Uccmal Posted February 3, 2016 Posted February 3, 2016 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. Awesome. What fund is 'my stupid ass?' I clearly remember the copper tear out days - quite instructive.
RhubarbXIV Posted February 3, 2016 Posted February 3, 2016 Awesome. What fund is 'my stupid ass?' I clearly remember the copper tear out days - quite instructive. That "my stupid ass" is just my personal results over the past five years in my personal account.
Uccmal Posted February 3, 2016 Posted February 3, 2016 Awesome. What fund is 'my stupid ass?' I clearly remember the copper tear out days - quite instructive. That "my stupid ass" is just my personal results over the past five years in my personal account. I knew that...
Jurgis Posted February 3, 2016 Posted February 3, 2016 Also, it's really easy to shit all over the value guys when growth has outperformed for the last 9 years.... So for how long does XXX has to underperform to be able to shit on it without being judged as harsh? "This guy is a really great investor! He has underperformed for 20 years only! Wait a bit, he's gonna show you!"
karthikpm Posted February 3, 2016 Posted February 3, 2016 One could argue the guys who pick the components of the S and P are the best active managers out there.
randomep Posted February 3, 2016 Posted February 3, 2016 Also, it's really easy to shit all over the value guys when growth has outperformed for the last 9 years.... So for how long does XXX has to underperform to be able to shit on it without being judged as harsh? "This guy is a really great investor! He has underperformed for 20 years only! Wait a bit, he's gonna show you!" 20 years sounds about right :) seriously though, we just don't know, but the way to survive this is to look more at the rationale, read Graham and Buffett, and look less at the results which is just market prices, unless of course you have a permanent loss of captial. I remember back in 2008 which was the 10th anniversary of my first brokerage account, I read an article which said that the S&P had gone nowhere for 10yrs, so all the time effort and capital spent on investing was for nothing, but the next year or so it was all worth it...... These guys could turn around in the blink of an eye! So don't sit out!
TwoCitiesCapital Posted February 3, 2016 Posted February 3, 2016 Also, it's really easy to shit all over the value guys when growth has outperformed for the last 9 years.... So for how long does XXX has to underperform to be able to shit on it without being judged as harsh? "This guy is a really great investor! He has underperformed for 20 years only! Wait a bit, he's gonna show you!" If you're invested with a value manager who is truly sticking to value sticks - then it's basically a guarantee they're going to underperform over a decade where value underperformed growth, and the benchmark, for basically 9 years in a row. If you wanted their performance to be better, you're literally asking them to charge a fee to stay in cash or to experience style drift. You could argue for the later, but it seem someone in here was pretty upset at the perceived "style drift" when the results really suggest they stuck with their bread & butter.
RhubarbXIV Posted February 3, 2016 Posted February 3, 2016 Also, it's really easy to shit all over the value guys when growth has outperformed for the last 9 years.... So for how long does XXX has to underperform to be able to shit on it without being judged as harsh? "This guy is a really great investor! He has underperformed for 20 years only! Wait a bit, he's gonna show you!" Again, wrong question. To judge skill by yearly performance alone could require more than a lifetime's worth of results, depending on your minimal required "alpha" for it to count and the level of certainty you're looking for that it exists. Trying to find a 1-2% effect in a data set where returns aren't distributed normally and have an average of ~9% plus or minus 20% (1915-2015 inflation-adjusted) you'd have to wait until damn near the heat-death of the universe to find small and statistically significant "alpha." You've got to beat the market by a lot for a long time for trailing performance figures to say much about your skill at investing. Buffett, Tepper, Greenblatt, etc. and maybe a few vampires (my hat's off to anyone who can beat the market by 1-2% over 600 years) are really the only ones we can assume to be skillful based on past performance alone. As a general guide, if you're looking at trailing results "do not shit lest ye be shat upon." If you want to find someone you CAN safely shit upon, pull up SeekingAlpha and just go wild in the comments section of the first writeup you find by an analyst who hasn't figured out how to read a 10k. Investing is about making good decisions in the future. If you want to judge other investors, do it by how well you understand and appreciate their process, not by what they've done. There are some real dufuses out there who don't do their homework and probably shouldn't be in business, but once you're past that hurdle, it's got to be about what you like. Past performance is just another method of data-mining.
randomep Posted February 3, 2016 Posted February 3, 2016 Also, it's really easy to shit all over the value guys when growth has outperformed for the last 9 years.... So for how long does XXX has to underperform to be able to shit on it without being judged as harsh? "This guy is a really great investor! He has underperformed for 20 years only! Wait a bit, he's gonna show you!" Again, wrong question. To judge skill by yearly performance alone could require more than a lifetime's worth of results, depending on your minimal required "alpha" for it to count and the level of certainty you're looking for that it exists. Trying to find a 1-2% effect in a data set where returns aren't distributed normally and have an average of ~9% plus or minus 20% (1915-2015 inflation-adjusted) you'd have to wait until damn near the heat-death of the universe to find small and statistically significant "alpha." You've got to beat the market by a lot for a long time for trailing performance figures to say much about your skill at investing. Buffett, Tepper, Greenblatt, etc. and maybe a few vampires (my hat's off to anyone who can beat the market by 1-2% over 600 years) are really the only ones we can assume to be skillful based on past performance alone. As a general guide, if you're looking at trailing results "do not shit lest ye be shat upon." If you want to find someone you CAN safely shit upon, pull up SeekingAlpha and just go wild in the comments section of the first writeup you find by an analyst who hasn't figured out how to read a 10k. Investing is about making good decisions in the future. If you want to judge other investors, do it by how well you understand and appreciate their process, not by what they've done. There are some real dufuses out there who don't do their homework and probably shouldn't be in business, but once you're past that hurdle, it's got to be about what you like. Past performance is just another method of data-mining. +1 ya I think of value investing is like tossing a unfair coin that wins 60% and loses 40% each year. Where winning is beating the market and losing is lagging. I still prefer my unfair coin to using a index fund and matching the market. But if my coin goes against me 2 years in a row, I don't bail. I will only bail if I don't believe odds on my unfair coin. The analogy is I won't quit until I don't believe in value investing, or if I think I cannot implement value investing.
Jurgis Posted February 3, 2016 Posted February 3, 2016 RhubarbXIV, great comments. Still I'm gonna go for "Mr. Popularity" title here 8) and say that anyone who underperforms for 5 years+, should just close the shop and stop selling themselves as great investor. Though of course it's free country and free markets and everyone is free to underperform for any time period they want. Peace and bear hugs
RhubarbXIV Posted February 3, 2016 Posted February 3, 2016 RhubarbXIV, great comments. Still I'm gonna go for "Mr. Popularity" title here 8) and say that anyone who underperforms for 5 years+, should just close the shop and stop selling themselves as great investor. Good luck getting Buffett to retire. ::)
Jurgis Posted February 3, 2016 Posted February 3, 2016 RhubarbXIV, great comments. Still I'm gonna go for "Mr. Popularity" title here 8) and say that anyone who underperforms for 5 years+, should just close the shop and stop selling themselves as great investor. Good luck getting Buffett to retire. ::) Yeah, I guess 2015 book value might get him there... :'( Edit: BTW, I found a loophole for Buffett. He's now running a company and not an investment vehicle. Company leaders don't have to close the shop if they underperform... wait but why? :P
RhubarbXIV Posted February 3, 2016 Posted February 3, 2016 RhubarbXIV, great comments. Still I'm gonna go for "Mr. Popularity" title here 8) and say that anyone who underperforms for 5 years+, should just close the shop and stop selling themselves as great investor. Good luck getting Buffett to retire. ::) Yeah, I guess 2015 book value might get him there... :'( Edit: BTW, I found a loophole for Buffett. He's now running a company and not an investment vehicle. Company leaders don't have to close the shop if they underperform... wait but why? :P Hate to break it to you, but he's been in the trailing-5-year BV doghouse since 2009-2013. But also, I don't give a shit. I dig his style.
randomep Posted February 3, 2016 Posted February 3, 2016 RhubarbXIV, great comments. Still I'm gonna go for "Mr. Popularity" title here 8) and say that anyone who underperforms for 5 years+, should just close the shop and stop selling themselves as great investor. Though of course it's free country and free markets and everyone is free to underperform for any time period they want. Peace and bear hugs Fortuantely, the Bruce Fund exercised its right to run a fund that lagged horribly in a bull market and was down to something like $2M AUM...... back in the late 90's
Pretium Posted February 3, 2016 Posted February 3, 2016 The comments in this thread seem to be putting "value" and "growth" in different buckets. As people in this thread know, growth is just a part of value. At the end of the day a stock's value is the discounted cash that can be taken out of the business over it's life. I work in institutional consulting, and yes Morningstar is used for everything. Are we really giving "value" managers a pass because they have underperformed growth type funds? This is just a marketing term Morningstar created to group funds that share similar statistics. Here are the criteria they use to determine a fund's style: Value Price to Projected Earnings 50% Price to Book 12.5% Price to Sales 12.5% Price to Cash Flow 12.5% Dividend Yield 12.5% Growth Long-term projected earnings growth 50% Historical earnings growth 12.5% Sales Growth 12.5% Cash Flow Growth 12.5% Book value growth 12.5% Do you think Warren Buffett or the other managers on this list give a shit about a stock's style as it fits in the Morningstar categories? The best managers I've seen when screening for clients do not care about whether research firms consider their fund to be growth, value, small, or large cap. They buy whatever they think has intrinsic value. It makes marketing the fund more difficult, but it's in the best interest of share holders who believe in the management's philosophy. Do you think Buffett gives a shit about Fama's research that shows a value premium given to low P/B stocks? I think he cares about understanding a business, conservatively forecasting future cash flow, and then discounting those cash flows at the long term treasury rate. Compare the market price to the IV, observe the margin of safety, and then make a decision. Basically I agree with Jurgis that people who underperform for long stretches (especially by enormous margins) should not get a free pass. It's funny how people think about funds. A manager could have an amazing track record for his first 10 years and suck the next 10 years. People will look for excuses about value/growth/sectors to explain the underperformance and still treat the manager like a god. But what the hell? Are we giving more weight to returns that were achieved 15 years ago rather than 5 years ago?
Jurgis Posted February 3, 2016 Posted February 3, 2016 But also, I don't give a shit. I dig his style. I guess I did not realize how bad the numbers are across the board (not only BRK) especially after 2015. Who'd think that the year SP500 was flat would be nail into a lot of value coffins. I guess I understand why people want to say "wait, this is like 2000, it's gonna turn soon". I am not sure if it will even though my portfolio is positioned towards the turn (BRK, FFH and similar). More sole searching ahead.
RhubarbXIV Posted February 3, 2016 Posted February 3, 2016 I guess I did not realize how bad the numbers are across the board (not only BRK) especially after 2015. Who'd think that the year SP500 was flat would be nail into a lot of value coffins. I guess I understand why people want to say "wait, this is like 2000, it's gonna turn soon". I am not sure if it will even though my portfolio is positioned towards the turn (BRK, FFH and similar). More sole searching ahead. I don't agree that the numbers are bad across the board. I mean, I'm a grown-ass man, I don't need to dump cheerios on my head whenever I see an expert strike out against a simple algorithm a few times in a row. Most of the funds I listed above still made 6-11% net annualized, which seems to me about in line with what I'd expect from a good fund charging 1-3% annual fees. If they'd all been down like 5% annualized, it'd be a different story, but nobody was. I really don't blame any of them for not keeping up with the S&P when it's on an unsustainable tear of 13% ann. If you want better than 6-11% you've probably got to do it yourself and really put your back into it. I have no idea who on that list will outperform for the 2016-2020 interval, which is really what's important. I suspect some are more likely than others, but I'll keep my opinions to myself for now. Usually when I like an investor that just means they agree with me- probably my worst habit. Maybe in some ways the whole "let the market be your servant not your master" thing might apply here, too. Some good funds are open to new investors for the first time in a long time, there's pressure on fees, etc. Seeing fund flows chase market ETFs at something like 8:1 relative to active managers, maybe the herd thins a bit. Maybe the ETF liquidity paradox breaks. Just try not to be so preoccupied with what everyone else is doing, e.g. the market. Yeah, the S&P500 got laid a lot in high school, but I figure the only way to succeed at investing is to just "do you," whatever that may mean.
Jurgis Posted February 3, 2016 Posted February 3, 2016 RhubarbXIV, fair enough, your opinion is well thought out, although I think I disagree with some of what you wrote. Good luck to you. :)
Picasso Posted February 3, 2016 Posted February 3, 2016 As long as the S&P 500 doesn't start banging my wife. Way to kick a value guy while he's down.
james22 Posted February 4, 2016 Posted February 4, 2016 ...anyone who underperforms for 5 years+, should just close the shop and stop selling themselves as great investor. I was a great investor for the 5 years 1995-2000.
wachtwoord Posted February 4, 2016 Posted February 4, 2016 ...anyone who underperforms for 5 years+, should just close the shop and stop selling themselves as great investor. I was a great investor for the 5 years 1995-2000. Haha touche
rranjan Posted February 4, 2016 Posted February 4, 2016 ...anyone who underperforms for 5 years+, should just close the shop and stop selling themselves as great investor. I was a great investor for the 5 years 1995-2000. Golden words.
SwimmingNaked Posted February 5, 2016 Posted February 5, 2016 Looks like it's finally momentum's turn for a schlonging. About time.
boilermaker75 Posted February 5, 2016 Posted February 5, 2016 ...anyone who underperforms for 5 years+, should just close the shop and stop selling themselves as great investor. I was a great investor for the 5 years 1995-2000. Stewart is that you?
Recommended Posts
Create an account or sign in to comment
You need to be a member in order to leave a comment
Create an account
Sign up for a new account in our community. It's easy!
Register a new accountSign in
Already have an account? Sign in here.
Sign In Now