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No alpha for Marty Whitman


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Unsurprising results but nonetheless interesting comparison between Third Avenue's performance against value index funds:

 

Third Avenue Management Defends Its Pursuit of Alpha

 

[…]

 

Not only did Third Avenue’s funds fail to outperform in each of the cases I analyzed, but they underperformed by wide margins. Maybe, just maybe, alpha is a lot harder to deliver than many, including David Barse, think. The Third Avenue funds I looked at certainly weren’t generating alpha or beating appropriate benchmarks.

 

An article I wrote in January 2014 gives this piece an amusing coda—though Third Avenue’s management wouldn’t think so. In that article, I commented on what the firm’s chairman Marty Whitman wrote. In the Third Avenue Fund’s October 2013 annual report to shareholders, Whitman severely criticized the research of recent Nobel Prize-winner Eugene Fama. Whitman called Fama’s work “utter nonsense, sloppy science, plain stupid, and unscholarly.”

 

Coincidentally, for many years, Fama was head of research for DFA.

 

Now, you would think that before denigrating the work of a Nobel Prize winner in his field of expertise, you would have extraordinary proof and data to offer. Unfortunately, Whitman offered none. If he had looked at the data, as I have done today, he would have saved himself a great deal of embarrassment.

 

http://www.advisorperspectives.com/articles/2015/10/19/third-avenue-management-defends-its-pursuit-of-alpha

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That is a pretty devastating takedown.

 

Alpha over long periods is incredibly difficult, implying that alpha over short periods is also incredibly difficult, but we often confuse luck for alpha.

 

Makes me happy most of my money is in passive or quant value ETFs.

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Seeing a lot of these sorts of articles kicking dirt on value managers and value exposures, which don't have the inherent glamour/momentum tilts in market cap index weighted funds.  Seems a likely contrarian indicator as much as anything.  Most of them were beating or hanging with the index funds until the most recent ~ 4 years which have really rewarded any momo or leveraged idiot.  I suspect the funds that survive the next five will look a lot better at that time (but I'm not about to starting paying them 2% per annum with less tax efficiency while I wait to find out!).

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Seeing a lot of these sorts of articles kicking dirt on value managers and value exposures, which don't have the inherent glamour/momentum tilts in market cap index weighted funds.  Seems a likely contrarian indicator as much as anything.  Most of them were beating or hanging with the index funds until the most recent ~ 4 years which have really rewarded any momo or leveraged idiot.  I suspect the funds that survive the next five will look a lot better at that time (but I'm not about to starting paying them 2% per annum with less tax efficiency while I wait to find out!).

 

I tend to agree with you in general but not in this case here. I can see your point when people are comparing, say, Bruce Beekowitz against the S&P 500. Here however the performance vs the S&P 500 wasn't even that bad. But losing out against value index funds over 5 and 15 years really challenges the fundamentals of your business as a value adding fund manager. I really doubt that TA would outperform those funds by such a margin in an eventual downturn that it would be able to close that gap.

 

Maybe they are just victim of their own success.

 

in and case, Swedroe was absolutely right in calling Whitman out with regard to his arrogant bashing of Fama.

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Per efficient market theory the reason for Third Avenue funds under-performing the benchmark beyond the expense ratio must be because they are taking lower risk than the markets  :) :)

 

The only other reason that efficient marketeers could point to - idiosyncratic risk - I would think should tend to be close to being eliminated over the very long term.

 

Larry Swedroe (the author) had the most influence of me before I found Graham and Buffett and I am pretty familiar with his writings. I participated in many online discussions with him and he was very generous with his time. My comments above are partly tongue in cheek and I think he has made many excellent points. But he also goes a bit extreme - suggesting that Buffett has no outperformance once we adjust for a new factor (quality).

 

Vinod

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VERY interesting in retrospect (2013 Wealthtrack interview with Whitman):

 

https://whatheheckaboom.wordpress.com/2015/01/19/notes-from-martin-whitmans-interview-with-wealthtrack-com/

 

His comment:

 

If we are wrong about China, it wouldn’t be economic problems, but more due to social problems.

 

Then there are his positions in Radian and MBIA in January 2008.  He was buying up real estate and associated financials back then.  He also wanted to invest in Bear Stearns as it was dropping but one of his peers at Third Avenue stopped him. 

 

I think "safe and cheap" sells fund shares, but it's harder for him to do in practice.  There are a number of investors who stayed away from those financials in 2008, seeing risks that were invisible to Marty.  He was focused on price to book ratios but that's not where the others were looking.

 

He really got into it with Bill Ackman over MBIA -- did he apologize?  Man was he wrong and extremely rude to Bill.  I think he called him a "promoter" and said he knew nothing about insurance.  It turned out that everything Bill said was correct and Marty didn't listen to any of it.

 

 

Here's his list of bargain stocks in October 2007:

 

http://archive.fortune.com/2007/10/16/news/newsmakers/bargain_stocks.fortune/index.htm

 

 

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Before the crisis he was way ahead of the S&P500.  Over the prior decade he had made something like 12% annualized vs 7% for the S&P500.

 

Perhaps he did very well by buying up the discounted shares of various companies every time some little worry came along (the reason for their discounts to NAV were those worries).  Each time the crisis never came, and he made a lot of money as the shares recovered.

 

That works great until the "worries" du jour escalate into a full-blown crisis. 

 

Perhaps a study could be done of how value investors as a group do over periods of time where no true crisis ever fully develops (the group outperforms) versus periods when a true crisis comes along (they get crushed by buying a concentrated mix of the "cheap" stuff before the party really gets going!).

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Before the crisis he was way ahead of the S&P500.  Over the prior decade he had made something like 12% annualized vs 7% for the S&P500.

 

Perhaps he did very well by buying up the discounted shares of various companies every time some little worry came along (the reason for their discounts to NAV were those worries).  Each time the crisis never came, and he made a lot of money as the shares recovered.

 

That works great until the "worries" du jour escalate into a full-blown crisis. 

 

Perhaps a study could be done of how value investors as a group do over periods of time where no true crisis ever fully develops (the group outperforms) versus periods when a true crisis comes along (they get crushed by buying a concentrated mix of the "cheap" stuff before the party really gets going!).

 

Yes, that would be interesting. Might fit the large "value cycles" Rich Pzenea – a value investor who, by the way, has out-performed most of the value indexes for the past 5 years – has talked about for years.

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Seeing a lot of these sorts of articles kicking dirt on value managers and value exposures, which don't have the inherent glamour/momentum tilts in market cap index weighted funds.  Seems a likely contrarian indicator as much as anything.  Most of them were beating or hanging with the index funds until the most recent ~ 4 years which have really rewarded any momo or leveraged idiot.  I suspect the funds that survive the next five will look a lot better at that time (but I'm not about to starting paying them 2% per annum with less tax efficiency while I wait to find out!).

 

Third Avenue got destroyed in 2008, too.

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Before the crisis he was way ahead of the S&P500.  Over the prior decade he had made something like 12% annualized vs 7% for the S&P500.

 

Perhaps he did very well by buying up the discounted shares of various companies every time some little worry came along (the reason for their discounts to NAV were those worries).  Each time the crisis never came, and he made a lot of money as the shares recovered.

 

That works great until the "worries" du jour escalate into a full-blown crisis. 

 

Perhaps a study could be done of how value investors as a group do over periods of time where no true crisis ever fully develops (the group outperforms) versus periods when a true crisis comes along (they get crushed by buying a concentrated mix of the "cheap" stuff before the party really gets going!).

 

Yes, that would be interesting. Might fit the large "value cycles" Rich Pzenea – a value investor who, by the way, has out-performed most of the value indexes for the past 5 years – has talked about for years.

 

According to Moringstar, he's under performed the average LV fund over 1, 5 and 10 years. He's doing a bit better in the 3 and 15 year periods though.

 

http://performance.morningstar.com/fund/performance-return.action?t=JCVIX

 

Keep in mind that this is the Institutional class so the performance is better than his regular fund. 

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If I may ask a (potentially) stupid question:

 

Is there anything that Third Avenue does better than anyone else? I am talking broadly, e.g. process, people, depth of investigative research, geographical expertise, types of situations, info flow from brokers, etc. I fully get that Marty Whitman is a legend, but as a firm, I am struggling to work out what makes Third Avenue better than 'general' value mutual fund providers e.g. Brandes, First Eagle; I am struggling to work out what makes them better at broader distressed situations than Avenue Capital, Oaktree, Baupost, Third Point, etc.

 

 

 

 

 

 

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Before the crisis he was way ahead of the S&P500.  Over the prior decade he had made something like 12% annualized vs 7% for the S&P500.

 

Perhaps he did very well by buying up the discounted shares of various companies every time some little worry came along (the reason for their discounts to NAV were those worries).  Each time the crisis never came, and he made a lot of money as the shares recovered.

 

That works great until the "worries" du jour escalate into a full-blown crisis. 

 

Perhaps a study could be done of how value investors as a group do over periods of time where no true crisis ever fully develops (the group outperforms) versus periods when a true crisis comes along (they get crushed by buying a concentrated mix of the "cheap" stuff before the party really gets going!).

 

Yes, that would be interesting. Might fit the large "value cycles" Rich Pzenea – a value investor who, by the way, has out-performed most of the value indexes for the past 5 years – has talked about for years.

 

 

I will always associate Richard Pzena with his comment in November 2007:

 

http://seekingalpha.com/article/55846-vic-rich-pzena-freddie-macs-the-cheapest-stock-ive-ever-seen

 

"Freddie Mac is the cheapest stock I've ever seen" -- or something like that.

 

This is a great insight:

Fears in the market don’t necessarily impact FRE’s business but are impacting its stock

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+1.

 

Pzena and the guy running Second Curve Capital (Thomas Brown?) are in great demand right now but their utterings in 2005-2008 kinda make me discount / ignore them.

 

If you think about it - there are just so, so few investment managers out there who have been proven by the passing of time as not having said anything dumb, were relatively measured with their words, did not talk about things that they know little about.. Munger is possibly the only one of them; a diamond in a world of rocks.

 

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If I may ask a (potentially) stupid question:

 

Is there anything that Third Avenue does better than anyone else? I am talking broadly, e.g. process, people, depth of investigative research, geographical expertise, types of situations, info flow from brokers, etc. I fully get that Marty Whitman is a legend, but as a firm, I am struggling to work out what makes Third Avenue better than 'general' value mutual fund providers e.g. Brandes, First Eagle; I am struggling to work out what makes them better at broader distressed situations than Avenue Capital, Oaktree, Baupost, Third Point, etc.

 

Dont think its fair to compare hedge funds with mutual funds. The more I think about mutual funds, the more I hate them as an investment vehicle. Almost impossible to generate outsized returns.

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If I may ask a (potentially) stupid question:

 

Is there anything that Third Avenue does better than anyone else? I am talking broadly, e.g. process, people, depth of investigative research, geographical expertise, types of situations, info flow from brokers, etc. I fully get that Marty Whitman is a legend, but as a firm, I am struggling to work out what makes Third Avenue better than 'general' value mutual fund providers e.g. Brandes, First Eagle; I am struggling to work out what makes them better at broader distressed situations than Avenue Capital, Oaktree, Baupost, Third Point, etc.

 

Dont think its fair to compare hedge funds with mutual funds. The more I think about mutual funds, the more I hate them as an investment vehicle. Almost impossible to generate outsized returns.

 

Agreed. But Avenue Capital and Oaktree do offer mutual funds.

 

 

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I don't really have a strong opinion on Pzena and have never seen him in an interview. He seems to prefer to keep a low profile. Just mentioned him because I remembered his value cycle theory and saw on his website while looking for it that he didn't all that bad against the value indexes. I can remember that Greenblatt – whom I think highly of – thinks highly of Pzena (they are friends, though).

 

I tried to read several of Whitman's books and found them all horribly written – very affected and in an overly academic posture – and I haven't learned anything from them. In his interviews and writings Whitman strikes me as very arrogant, not mainly in the sense of high self-esteem (like e.g. Bill Ackman) but in the sense of talking down to people.

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If I may ask a (potentially) stupid question:

 

Is there anything that Third Avenue does better than anyone else? I am talking broadly, e.g. process, people, depth of investigative research, geographical expertise, types of situations, info flow from brokers, etc. I fully get that Marty Whitman is a legend, but as a firm, I am struggling to work out what makes Third Avenue better than 'general' value mutual fund providers e.g. Brandes, First Eagle; I am struggling to work out what makes them better at broader distressed situations than Avenue Capital, Oaktree, Baupost, Third Point, etc.

 

Dont think its fair to compare hedge funds with mutual funds. The more I think about mutual funds, the more I hate them as an investment vehicle. Almost impossible to generate outsized returns.

 

Agreed. But Avenue Capital and Oaktree do offer mutual funds.

 

The fact that some of these guys manage mutual funds probably saved their ass in 2008/2009.

 

I presume they wanted to get more focused and concentrated in their "best ideas" but the mutual fund restrictions saved them from themselves.

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If I may ask a (potentially) stupid question:

 

Is there anything that Third Avenue does better than anyone else? I am talking broadly, e.g. process, people, depth of investigative research, geographical expertise, types of situations, info flow from brokers, etc. I fully get that Marty Whitman is a legend, but as a firm, I am struggling to work out what makes Third Avenue better than 'general' value mutual fund providers e.g. Brandes, First Eagle; I am struggling to work out what makes them better at broader distressed situations than Avenue Capital, Oaktree, Baupost, Third Point, etc.

 

Dont think its fair to compare hedge funds with mutual funds. The more I think about mutual funds, the more I hate them as an investment vehicle. Almost impossible to generate outsized returns.

 

Agreed. But Avenue Capital and Oaktree do offer mutual funds.

 

The fact that some of these guys manage mutual funds probably saved their ass in 2008/2009.

 

I presume they wanted to get more focused and concentrated in their "best ideas" but the mutual fund restrictions saved them from themselves.

 

+1

 

Though not true for all, e.g. for Berkowitz. 2008 showed which people really go the extra mile and do their own research and which ones just more or less concentrate on value statistics like an index fund would.

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