Hang in There!

[jtvalue]

This has been a brutal market environment for value investors and I see parallels between the 1998-2000 timeframe.  Growth investing has now significantly outperformed value investing over the last 1, 3, 5, and 10 years.  Check out the performance of several "value" investors in 2015 below.  This is the time when we need to hold our conviction in value investing the most!  I don't know when this trend turns or what the catalyst will be, but when it does turn it will be powerful

 

S&P 500: +1.38%

Seth Klarman: -6.7%

Joel Greenblatt: -10.2%

Bruce Berkowitz: -11.5%

Warren Buffett: -12.5%

Longleaf Partners: -18.8%

David Einhorn: -20.2%

Bill Ackman: -20.5%

 

Sources:

 

http://www.valuewalk.com/2016/01/investment-success-forget-opponents-focus-par/

 

http://www.valuewalk.com/2015/10/value-stocks-vs-growth/

[Picasso]

A lot of those guys have either lost their touch or changed their investing style.

 

Klarman - His energy/resource team is taking on really silly bets.  Now they've invested in the debt of Aubrey's newest nat gas scheme.  I predict that in 2017 Jim Mooney leaves the fund. 

Greenblatt - He's stuck to his process, probably does fine in the future.

Berkowitz - This guy has lost his mind.  Literally just throwing crap at the wall hoping it sticks.

Buffett - He's stuck to his process, will do fine (understatement there).

Longleaf - They basically take macro bets now, what else can you expect to happen?

Einhorn - His heart doesn't seem in it anymore.  His investment due diligence seems to get lazier and lazier.

Ackman - Also changed investing styles and started drinking too much of his own kool aid. 

 

I think 90% of various "value" underperformance is laziness and style drift. 

[CorpRaider]

Just a few more data points re: 2015 that we all probably know:

 

IUSV (4.15%)

IWD  (4.0%)

VLUE (3.66%)

VTV  (.96%)

VBR (4.67%)

RPV (8.42%)

QVAL (13.47%)

 

But I bet it feels a lot better to pay .20% and get smoked than 2/20.

[Jurgis]

Screw value investing! Long live FANG!

 

8)

 

This message does not mean what you think it means. Or the opposite.

[AzCactus]

Not to be critical, but I think showing a one year time frame is irrelevant.  Maybe showing the 5/10 year performance of those guys would be helpful. 

 

I don't think many people on this board have outperformed every year for the last ten.

[karthikpm]

This has been a brutal market environment for value investors and I see parallels between the 1998-2000 timeframe.  Growth investing has now significantly outperformed value investing over the last 1, 3, 5, and 10 years.  Check out the performance of several "value" investors in 2015 below.  This is the time when we need to hold our conviction in value investing the most!  I don't know when this trend turns or what the catalyst will be, but when it does turn it will be powerful

 

S&P 500: +1.38%

Seth Klarman: -6.7%

Joel Greenblatt: -10.2%

Bruce Berkowitz: -11.5%

Warren Buffett: -12.5%

Longleaf Partners: -18.8%

David Einhorn: -20.2%

Bill Ackman: -20.5%

 

Sources:

 

http://www.valuewalk.com/2016/01/investment-success-forget-opponents-focus-par/

 

http://www.valuewalk.com/2015/10/value-stocks-vs-growth/

 

 

My only quibble with this is that Berkshire returns should be measured by BV and not the stock's price action for the year. They may have been the same but we don't know what the BV for Berkshire was at the end of the year  . Berkshire is a collection of operating businesses as compared to the other names in the list.

[doughishere]

A lot of those guys have either lost their touch or changed their investing style.

 

Klarman - His energy/resource team is taking on really silly bets.  Now they've invested in the debt of Aubrey's newest nat gas scheme.  I predict that in 2017 Jim Mooney leaves the fund. 

Greenblatt - He's stuck to his process, probably does fine in the future.

Berkowitz - This guy has lost his mind.  Literally just throwing crap at the wall hoping it sticks.

Buffett - He's stuck to his process, will do fine (understatement there).

Longleaf - They basically take macro bets now, what else can you expect to happen?

Einhorn - His heart doesn't seem in it anymore.  His investment due diligence seems to get lazier and lazier.

Ackman - Also changed investing styles and started drinking too much of his own kool aid. 

 

I think 90% of various "value" underperformance is laziness and style drift.

 

So I assume your up for the year Picasso?

[tede02]

Stocks with "value" characteristics have without a doubt, been unfavorable in recent years.  Frankly, the best general approach in recent years was to own the S&P500.  But as is always the case, market sentiment will eventually change and go in another direction.  Value investing is an approach that works over time, not every time. 

[Picasso]

Why does my performance for the year matter in this conversation?  My point is that guys like Buffett or Greenblatt have stuck to their process and many others have not.  Baupost still has a great process but Mooney dropped the ball big time. 

 

Berkowitz has started playing with lotto tickets (Sears, Fannie and Freddie, St. Joe, some resource company I forget) when it's clear those investments are long shots and outside his circle of competence.  If he stuck to his old process he'd be looking at much different performance figures.  I'd assume for the better.  His 5 & 10 year numbers (since he changed his process) are absolutely shit and sorry but that's a long enough timeframe to know you're not doing something right.

 

Ackman also changed his style to a more "quality over value" by loading up on a bunch of roll ups at the very top.  He drank too much of his own platform kool aid and has even called this new process "Pershing 3.0" which shows you it's not the same fund as before.  His insider trading on AGN was the only thing that has saved his performance the past couple years.  Take that out and his numbers have been poor since he changed into Pershing 3.0.

 

Anyone who has followed Einhorn for a while knows that his process isn't as good as it used to be.  There's a lot more laziness and sloppy work involved.  Whether it's assumptions he makes on cyclical stocks like MU, CNX, GM there are big flaws that one could point out with a little bit more work. 

 

My point is that the core process works (finding a margin of safety, staying in your circle of competence) but it fails when you start moving outside of it.  Stick to what works even though you might feel like you're smart enough to take on some FNMA legal battle.  All that time could be spent finding simple ideas that are trading very cheaply.

[Guest Grey512]

Anyone here watched HBO's "The Wire"? There's a quote there that is quite instructive: "Game's the same, just got more fierce".

 

I wouldn't expect Baupost, Greenlight, Buffett (or anyone else that is widely admired by COBF, for that matter) to continue outperforming the S&P by the same margin as they have in the past.

 

The simple truth is that the game is getting harder. Info is getting arbitraged away faster. Financial education and modelling skills are free and ubiquitous. The depth and breadth of sell-side research has exploded (if you look on a 10,20, 30-yr basis). If any one of you COBF guys was magically transported back to the early 80s with no knowledge of what had happened since but you still had your current skills (ability to read and understand the filings and footnotes, an understanding of the margin-of-safety concept, and some simple financial maths knowledge e.g. how to think about ROIC vs WACC, ROE vs cost of equity vs price-to-book, etc) then you probably would have done meaningfully better than S&P500 TR.

 

Be it the Internet, the ever-growing attendance in Omaha each spring or the rapidly-growing popularity of investing and value-investing books (e.g. if you look at Amazon rankings), competition will continue increasing. On a deeper level, the distinction between the concept of a 'person' and capital is becoming more and more washed out.

 

Another thought is that the cost of relative excellence here is increasing. By 'cost' I mean everything - mental cost, psychological anguish cost, man-hours to scour footnotes, IT/tech cost, research cost. Big HFs are spending $'000s to pay for satellite imaging services that tell you the number of cars in a Chipotle or Macy's car park and infer the SSS store sales that way; they also can tell from shadows on China construction lots whether the China capex cycle is peaking or not.

 

Opportunities to make money will always be there but they will not be an abundant, and it will continue getting harder and harder. Of course there will be an odd 20-40% crash every now and then; the weak money will get washed out, people will get disillusioned and competition will get dampened briefly, but the trend remains. Technology and freedom of info work. There is a big bubble out there in investment management right now. 50% of all long-only managers shouldn't exist. 50% of all HFs also shouldn't exist. Fees should go down by 50% and they gradually will.   

 

One other observation: The big winners in the next few decades of investing will probably be those portfolio managers who understand tech and how it is changing the world as well as its geopolitics. Todd & Ted at BRK seem to get it but I am not yet sure to what extent. If I was picking a manager today, I would try to make damn sure that they can think laterally about tech and how it will change the way we live in 10-20 yrs.

[Picasso]

That's very true Grey.  It's not good enough to stay good at the game, you have to constantly get better.  Also most of those guys had their best returns on much smaller AUM. 

[fareastwarriors]

Seems like I should shift more of my assets to just index funds and call it a day.

 

[AzCactus]

One issue that I haven't seen mentioned is the sheer capital that some of these guys are managing.  Size is the anchor of performance.  I think some decent investor may have said that. 

[Uccmal]

Anyone here watched HBO's "The Wire"? There's a quote there that is quite instructive: "Game's the same, just got more fierce".

 

I wouldn't expect Baupost, Greenlight, Buffett (or anyone else that is widely admired by COBF, for that matter) to continue outperforming the S&P by the same margin as they have in the past.

 

The simple truth is that the game is getting harder. Info is getting arbitraged away faster. Financial education and modelling skills are free and ubiquitous. The depth and breadth of sell-side research has exploded (if you look on a 10,20, 30-yr basis). If any one of you COBF guys was magically transported back to the early 80s with no knowledge of what had happened since but you still had your current skills (ability to read and understand the filings and footnotes, an understanding of the margin-of-safety concept, and some simple financial maths knowledge e.g. how to think about ROIC vs WACC, ROE vs cost of equity vs price-to-book, etc) then you probably would have done meaningfully better than S&P500 TR.

 

Be it the Internet, the ever-growing attendance in Omaha each spring or the rapidly-growing popularity of investing and value-investing books (e.g. if you look at Amazon rankings), competition will continue increasing. On a deeper level, the distinction between the concept of a 'person' and capital is becoming more and more washed out.

 

Another thought is that the cost of relative excellence here is increasing. By 'cost' I mean everything - mental cost, psychological anguish cost, man-hours to scour footnotes, IT/tech cost, research cost. Big HFs are spending $'000s to pay for satellite imaging services that tell you the number of cars in a Chipotle or Macy's car park and infer the SSS store sales that way; they also can tell from shadows on China construction lots whether the China capex cycle is peaking or not.

 

Opportunities to make money will always be there but they will not be an abundant, and it will continue getting harder and harder. Of course there will be an odd 20-40% crash every now and then; the weak money will get washed out, people will get disillusioned and competition will get dampened briefly, but the trend remains. Technology and freedom of info work. There is a big bubble out there in investment management right now. 50% of all long-only managers shouldn't exist. 50% of all HFs also shouldn't exist. Fees should go down by 50% and they gradually will.   

 

One other observation: The big winners in the next few decades of investing will probably be those portfolio managers who understand tech and how it is changing the world as well as its geopolitics. Todd & Ted at BRK seem to get it but I am not yet sure to what extent. If I was picking a manager today, I would try to make damn sure that they can think laterally about tech and how it will change the way we live in 10-20 yrs.

 

Good god.  That's exhausting.  No offense but people have been saying the same stuff since time immemorial - Graham himself warned of the death of value investing in the 1970s.  And Buffett, Walter Schloss and a bunch of others went right on outperforming.  Computers and progressively faster data crunching has been around for 40 years, and we have had several vicious bear markets in that time.  Right now, oil is in a severe bear market.  That is where the value is today.  Every day there is a new announcement by mega oil co.s about cutting their drilling budgets.  In a coupke of years it will be something else.

 

Its about temperment.  Until you can duplicate that with a machine somehow, your doomsday scenario will never arrive. 

[Guest Grey512]

Good god.  That's exhausting.  No offense but people have been saying the same stuff since time immemorial - Graham himself warned of the death of value investing in the 1970s.  And Buffett, Walter Schloss and a bunch of others went right on outperforming.  Computers and progressively faster data crunching has been around for 40 years, and we have had several vicious bear markets in that time.  Right now, oil is in a severe bear market.  That is where the value is today.  Every day there is a new announcement by mega oil co.s about cutting their drilling budgets.  In a coupke of years it will be something else.

 

Its about temperment.  Until you can duplicate that with a machine somehow, your doomsday scenario will never arrive.

 

It depends on what you want.

If you want to compound at 8-12% pre-tax: anyone who has the right temperament and keeps it simple can do it.

If you want to compound at 15%+ pre-tax: that's probably out of the question for 99% of people out there.

 

And who's talking about oil?

[AzCactus]

Good god.  That's exhausting.  No offense but people have been saying the same stuff since time immemorial - Graham himself warned of the death of value investing in the 1970s.  And Buffett, Walter Schloss and a bunch of others went right on outperforming.  Computers and progressively faster data crunching has been around for 40 years, and we have had several vicious bear markets in that time.  Right now, oil is in a severe bear market.  That is where the value is today.  Every day there is a new announcement by mega oil co.s about cutting their drilling budgets.  In a coupke of years it will be something else.

 

Its about temperment.  Until you can duplicate that with a machine somehow, your doomsday scenario will never arrive.

 

It depends on what you want.

If you want to compound at 8-12% pre-tax: anyone who has the right temperament and keeps it simple can do it.

If you want to compound at 15%+ pre-tax: that's probably out of the question for 99% of people out there.

 

This is out of the question for 99% of the people irrespective of the strategy employed. 

 

 

[TorontoRaptorsFan]

That's very true Grey.  It's not good enough to stay good at the game, you have to constantly get better.  Also most of those guys had their best returns on much smaller AUM.

 

Berkowitz's performance started to decline when he moved to Florida, started wearing contacts, and was busy designing his new office/museum...

 

 

[Picasso]

That's very true Grey.  It's not good enough to stay good at the game, you have to constantly get better.  Also most of those guys had their best returns on much smaller AUM.

 

Berkowitz's performance started to decline when he moved to Florida, started wearing contacts, and was busy designing his new office/museum...

 

Ackman's performance started to decline when he was featured on the cover of Bloomberg magazine with the caption "How do you like me now?" and decided he was going to flip a $100 million condo in NYC. 

 

Fund of funds should add "is the manager swapping their glasses for contacts" on their due diligence reports.

[John Hjorth]

Ref. : "Hang in there" :

 

The [not so] poor Norwegian people getting less rich by every second right now : The algorithm at the website for Statens Pensionsfond Utland is very busy right now adjusting the total portfolio value downwards :

 

www.nbim.no

[Jurgis]

One other observation: The big winners in the next few decades of investing will probably be those portfolio managers who understand tech and how it is changing the world as well as its geopolitics. Todd & Ted at BRK seem to get it but I am not yet sure to what extent. If I was picking a manager today, I would try to make damn sure that they can think laterally about tech and how it will change the way we live in 10-20 yrs.

 

So who apart of Todd&Ted you think understand this and are good at this?

 

 

[Guest Grey512]

One other observation: The big winners in the next few decades of investing will probably be those portfolio managers who understand tech and how it is changing the world as well as its geopolitics. Todd & Ted at BRK seem to get it but I am not yet sure to what extent. If I was picking a manager today, I would try to make damn sure that they can think laterally about tech and how it will change the way we live in 10-20 yrs.

 

So who apart of Todd&Ted you think understand this and are good at this?

 

Coatue probably do. Tiger Global also. Maybe Passport / John Burbank. Baupost seem to get it (own PYPL; used to own MSFT). Icahn's son maybe.

 

 

 

[CorpRaider]

To me this is really just a permutation of the "lack of breadth," "FANG," momo outperformance, cyclicality of the value premium discussion that has been raging for the last year or three.  Most of those guys (at least the value tilted etfs I listed) will probably look a lot better a few years hence, just like they did a few years ago, of course the average investor in their funds will probably underperform the index. 

[randomep]

oooooooooooooooh

 

I sense this thread is going more and more into the realm of efficiency. I totally agree with umccal earlier who said there is always some crises. In a crisis somebody is losing their shirt and someone will rise from the ashes obscenely rich.  I just want a anyone to look at the chart of the S&P 500 and tell me it isn't more volatile today than say in the 50's when Buffett started out. 

 

The world is growing, and many emerging markets will bring billions out of poverty. In the process there is money to be made. If we are saying it is tough for the likes of Ackman and Buffett to make money, then who is making money?  The distribution of rich and poor people must be extreme so there is some group of people getting rich from the current market.

 

I think what we see as harder is really just more painful. We see it is more painful to make money. For example, those who made money through 2008-2009 had scars (myself included). It's like people coming out of prison, it was a good experience and I am better for it but I wouldn't want to experience it again. 

 

Also we are looking in the rear view mirror at how various superinvestors made money. But whenever someone finds an inefficiency it gets arbitraged out. BUT more inefficiencies will take it's place. It just will come from a different place. We just have to find it.  Look at how John Paulson made his fortune in 2008.......

 

Another contributor to our pain is that it takes a longer period of time for value ideas to play out, I sense in Buffett's day his idea pan out faster than if he did that today.......

 

 

[RhubarbXIV]

I think market efficiency is a straw man.

 

Whenever I hear "the market is more efficient nowadays" I substitute in my head "the factor(s) I associate with investment acumen has recently performed poorly" and it makes a lot more sense.

 

An analog might be chess. Consider that the goal never changes: capturing the king [earning a high return on capital]. Over the years the number of avid tournament-level players has varied significantly, but the Elo rating system makes it fairly easy to make informed comparisons between players of different eras- Alekhine v. Carlsen or Morphy v. Anand (top players of different eras) would still make for some great chess.

 

Despite that the goal never changes, the pieces never change, the rules never change, and the skill of top players hasn't changed dramatically, chess openings DO go in and out of style over time. Until the interwar era basically nobody opened d4, but today it happens almost as often as e4. The game itself changes.

 

"P/B beats the market" - sure, and it should, until B becomes less important to the generation of E

"Low PE beats the market" - sure, and it should, until the business cycle loads you up with levered cyclicals or failing banks

"High ROIC beats the market" - sure, and it should, unless the price you pay gives the market too much time to catch up while your returns converge to the ROIC

"Low EV/EBITDA beats the market"

"Activism beats the market"

-you can see where I'm going with this.

 

So you've got two choices:

1. do something that makes sense in the EXTREME long-term and stick to it come hell or high water for 10-30 years

2. adopt a more fluid adaptive approach and embrace the possibility that you might REALLY screw it up at some point that would take 10+ years to recover from

 

Either way, nobody said it was easy. Some folks get good bounces early, some get 'em late, some not at all, but we're all just playing the odds.

 

SO. For your edification I've compiled a short list of managers who have beaten the market (S&P500) substantially ITD, and yet have underperformed significantly in the past five years to 2015-12-31. References NOT available upon request. Many of the listed funds do not publicly disclose returns.

 

The S&P 500 returned 12.6% 2011-2015, these folks all returned less.

 

Alphabetically:

Al Frank

Aquamarine (Guy Spier)

Ariel

Auxier

Baupost

Berkshire (BV)

Chou

Cundill

Daruma

Fairfax

Fairholme (Berkowitz)

First Eagle

FPA Crescent

Hancock (Pzena)

Horizon Kinetics (Murray Stahl)

Longleaf

My stupid ass

Omega

Pabrai

Pershing Square (Ackman)

Punch Card

Royce

Russell 2000 (whoever the hell he is)

Semper Vic (Tom Russo)

Sequoia

Third Point (Dan Loeb)

Wasatch

Yacktman

 

So did someone release an odorless, colorless, tasteless neurotoxin in Omaha at Buffetjam '09?

 

Did these funds suddenly get too big to perform? Probably not (most are well below peak pre-crisis AUM).

 

I also know some smaller guys who just work by themselves and do pretty great, even without satellites (although I do know a guy who speaks Swedish, so maybe that's what it takes nowadays).

 

So is thinking over? Because too many people are doin' it? Doubtful. Maybe? If so, not for long.

 

I've seen something like this before. But there's no guarantee this time will end with us doing donuts of joy in the AZO parking lot while the dotcom unicorns rip the copper out of their office walls for beer money.

 

Regardless, we've gotta try, right? That's why were here after all.

 

 

 

[TwoCitiesCapital]

I think market efficiency is a straw man.

 

Whenever I hear "the market is more efficient nowadays" I substitute in my head "the factor(s) I associate with investment acumen has recently performed poorly" and it makes a lot more sense.

 

An analog might be chess. Consider that the goal never changes: capturing the king [earning a high return on capital]. Over the years the number of avid tournament-level players has varied significantly, but the Elo rating system makes it fairly easy to make informed comparisons between players of different eras- Alekhine v. Carlsen or Morphy v. Anand (top players of different eras) would still make for some great chess.

 

Despite that the goal never changes, the pieces never change, the rules never change, and the skill of top players hasn't changed dramatically, chess openings DO go in and out of style over time. Until the interwar era basically nobody opened d4, but today it happens almost as often as e4. The game itself changes.

 

"P/B beats the market" - sure, and it should, until B becomes less important to the generation of E

"Low PE beats the market" - sure, and it should, until the business cycle loads you up with levered cyclicals or failing banks

"High ROIC beats the market" - sure, and it should, unless the price you pay gives the market too much time to catch up while your returns converge to the ROIC

"Low EV/EBITDA beats the market"

"Activism beats the market"

-you can see where I'm going with this.

 

So you've got two choices:

1. do something that makes sense in the EXTREME long-term and stick to it come hell or high water for 10-30 years

2. adopt a more fluid adaptive approach and embrace the possibility that you might REALLY screw it up at some point that would take 10+ years to recover from

 

Either way, nobody said it was easy. Some folks get good bounces early, some get 'em late, some not at all, but we're all just playing the odds.

 

SO. For your edification I've compiled a short list of managers who have beaten the market (S&P500) substantially ITD, and yet have underperformed significantly in the past five years to 2015-12-31. References NOT available upon request. Many of the listed funds do not publicly disclose returns.

 

The S&P 500 returned 12.6% 2011-2015, these folks all returned less.

 

Alphabetically:

Al Frank

Aquamarine (Guy Spier)

Ariel

Auxier

Baupost

Berkshire (BV)

Chou

Cundill

Daruma

Fairfax

Fairholme (Berkowitz)

First Eagle

FPA Crescent

Hancock (Pzena)

Horizon Kinetics (Murray Stahl)

Longleaf

My stupid ass

Omega

Pabrai

Pershing Square (Ackman)

Punch Card

Royce

Russell 2000 (whoever the hell he is)

Semper Vic (Tom Russo)

Sequoia

Third Point (Dan Loeb)

Wasatch

Yacktman

 

So did someone release an odorless, colorless, tasteless neurotoxin in Omaha at Buffetjam '09?

 

Did these funds suddenly get too big to perform? Probably not (most are well below peak pre-crisis AUM).

 

I also know some smaller guys who just work by themselves and do pretty great, even without satellites (although I do know a guy who speaks Swedish, so maybe that's what it takes nowadays).

 

So is thinking over? Because too many people are doin' it? Doubtful. Maybe? If so, not for long.

 

I've seen something like this before. But there's no guarantee this time will end with us doing donuts of joy in the AZO parking lot while the dotcom unicorns rip the copper out of their office walls for beer money.

 

Regardless, we've gotta try, right? That's why were here after all.

 

+1

 

Also, it's really easy to shit all over the value guys when growth has outperformed for the last 9 years....

 

Value is dead! Long live value!