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The demise of a value investor


KJP
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The blogger at 17 Mile is shutting down his blog due to, among other things, the collapse of his strategy.  His last post is a very candid assessment of his performance, strategy and current abilities.  I found the post-mortem, along with a review of his prior investment theses (mostly well known names), helpful in reminding me about my own limitations as an individual investor, concentration/diversification, and what types of investments I should be considering versus putting in the too-hard/too-levered pile. 

 

In case anyone else find's it useful, here's a link:  http://seventeenmile.com/ 

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market is down like 14% and people are throwing in the towel? This is nothing in the course of a regular market.

 

I actually feel kinda bad for the guy:

 

"A mutual fund shop I became familiar with in college puts out a weekly market commentary. From what I had seen, they had a pretty strong record of “calling the market”. Soon after the March 2009 bottom, they began preaching about “bear market rallies” and the potential for “new secular bear market lows”. Having just got my “fund” back to even, I was not about to put my friends and family through another -40% decline again, no matter how little money they had with me. So I closed up “shop” and returned the money. In late 2009 I began investing my own capital again. Again, under the “guidance” of the mutual fund shop, I fully hedged my portfolio in anticipation of new bear market lows. With the wonderful addition of the likes of John Hussman, Prem Watsa and Seth Klarman to my reading docket, I would go on to endure four excruciating years of worrying about the market."

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We are possibly entering the 3rd, 50%+ bear market in just 16 years. This is unheard of or based on my limited knowledge of history.

 

While this person may have had bad picks, bad strategy, weak research or whatever, I doubt that this is the entire story.

 

When Warren Buffett says that America's best days lie ahead, he pisses me off. Is he a cheerleader, a liar?

I think that not only he was lucky to be born in the U.S. as he says but, he was also even more lucky to be born at the time he was.

 

There is no way IMO that the U.S. will ever experience again the kind of growth rate in GDP that it once did. Maybe this is due to demographics or that people have their basic needs mostly covered but, you can tell that something feels wrong.

 

Cardboard

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When Warren Buffett says that America's best days lie ahead, he pisses me off. Is he a cheerleader, a liar?

 

 

Cardboard

 

I too have wondered that. He wrote an article about the IOUs the country was producing and it was a bit on the alarming side probably 15 years or so ago. We're wayyy more in debt now than then.

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Meh, every time I've heard WEB talk about it he says that even at 3% you're doubling GDP in a generation.  That ain't bad when you're talking about already being rich.  He talked with whats his face from Cerberus at the national economic club about this stuff like last year, I think.  Says easy to close the gap to 2% of GSP deficit which is sustainable with simpson-boles or many other plans.

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Guest Grey512

market is down like 14% and people are throwing in the towel? This is nothing in the course of a regular market.

 

What did this guy in was that it looks like he overconcentrated his ptf in energy.

 

The guy grew up in an environment where China binged on capex & commodities fuelling the commodities supercycle, whilst at the same time rates were dropping for 3 decades. Both cycles are turning the other way (though the rates side of it is debatable), and this guy picked that exact moment to go long commodity stocks.

 

 

 

 

 

 

 

 

 

 

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We are possibly entering the 3rd, 50%+ bear market in just 16 years. This is unheard of or based on my limited knowledge of history.

 

While this person may have had bad picks, bad strategy, weak research or whatever, I doubt that this is the entire story.

 

When Warren Buffett says that America's best days lie ahead, he pisses me off. Is he a cheerleader, a liar?

I think that not only he was lucky to be born in the U.S. as he says but, he was also even more lucky to be born at the time he was.

 

There is no way IMO that the U.S. will ever experience again the kind of growth rate in GDP that it once did. Maybe this is due to demographics or that people have their basic needs mostly covered but, you can tell that something feels wrong.

 

Cardboard

 

+1

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Guest Grey512

Right Grey and how is your Amazon pick doing by the way? Any fear that it may go to $100 a share?

 

Think it is crazy? I would say that anything is possible under a depression scenario.

 

It is easy to tell someone's else mistakes using hindsight.

 

Cardboard

 

Not to hijack the thread, but AMZN is less than 1% of my portfolio; I bought it to force myself to keep an eye on it.. But I grant you your point, AMZN's not doing well and could go lower.

 

Look, the point I am making is that the blog poster (17Mile) went aggressive. If you read his blog, he himself admits that he's trying to combine Buffett's value focus with "Druckenmiller aggressiveness". When you go for the jugular and put 30+% of your portfolio in a correlated basket of trades (e.g. mid-stream energy), you occasionally will take a massive draw-down. That's why concentration is such a difficult, always perplexing and infinitely interesting topic. I could talk about it for hours; even 20 yrs from now I'm sure I'll still struggle with it..

 

And my point wasn't to kick the guy when he's down, I'm just trying to deconstruct what happened there.

 

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Guest Grey512

When Warren Buffett says that America's best days lie ahead, he pisses me off. Is he a cheerleader, a liar?

I think that not only he was lucky to be born in the U.S. as he says but, he was also even more lucky to be born at the time he was.

 

There is no way IMO that the U.S. will ever experience again the kind of growth rate in GDP that it once did. Maybe this is due to demographics or that people have their basic needs mostly covered but, you can tell that something feels wrong.

I'm in full agreement with you there.

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market is down like 14% and people are throwing in the towel? This is nothing in the course of a regular market.

 

What did this guy in was that it looks like he overconcentrated his ptf in energy.

 

The guy grew up in an environment where China binged on capex & commodities fuelling the commodities supercycle, whilst at the same time rates were dropping for 3 decades. Both cycles are turning the other way (though the rates side of it is debatable), and this guy picked that exact moment to go long commodity stocks.

 

I don't think it's that simple.  He also has extensive write ups of Hertz and VRX, among others.  What I found useful was asking myself whether I would have come to a different conclusion about those companies at the time and, if not, what that says about the types of opportunities I should be considering.

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It sounds like overconcentration was his undoing not value, growth or a combination.  And saying possible 50% drawdown at this point seems a bit premature.  It's a possibility to be sure but not sure that's he problem that this guy had.

 

Many (most?) of his investments were also highly levered.

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Quoting him for posterity. I have been following him for a few years and was envious of his returns, but couldn't quite grasp the process.

 

 

Goodbye

 

February 9, 2016 Goodbye, INTRO

17 Mile

 

Goodbye

 

February 9, 2016

 

Dear Reader/Follower,

 

Sadly, and embarrassingly, I must announce that I am shutting down 17 Mile. In my case it is a proverbial ‘liquidation’ of the portfolio and strategy that I have operated since June 15, 2014.

 

I am looking for zero sympathy. The only reason I am ‘announcing’ this is that I have run the 17 Mile blog publicly in order to exert as much performance pressure on myself as possible. So, with the ‘strategy’ having now collapsed, it is only fair that this collapse is made public.

 

What Happened

 

From the outset I have described my ‘strategy’ as ‘Loeb-style events + Druckenmiller aggressiveness’. I was fortunate to start off with good performance from 6/15/14 thru early November 2015, but I knew all along that I would have to prove myself thru a period of significant difficulty. As my energy holdings began to decline from mid-November into early December, I believed that time was upon me. As such, I not only welcomed it, but relished it. I love challenges, and there is nothing more challenging and exhilarating than battling it out with the market.

 

NAV went from $18.63 on an intra-day basis the first day of trading in November…but went on to decline to below $10 (the 6/15/14 starting level) in early December. While obviously disconcerting, I believed there to be so much value in the portfolio at those depressed levels that I sincerely thought I would be back at new highs in no time once the tax-driven forced selling abated in my ‘high quality’ energy midstream assets. The portfolio ended the year over $13 on a mid-December bounce back, but selling intensified as the New Year hit, driving the portfolio down to $10.53 at the end of January.

 

Despite further pain, I had managed to trade around the volatility in January in order to not only limit the performance damage but to put myself in good position for the ‘inevitable’ comeback in midstream. Selling continued into February however, but I believed it to be just another part of the ‘bottoming process’ and thus continued to average down.

 

After ETE’s after-hours 8K last Friday I knew there was a good chance yesterday would be a bad day, but thought it could likely mark the final bottom. So when ETE and WMB declined by more than 30% in the opening 30 minutes of trading on extremely high volume, I was ecstatic because it had all of the markings of a final capitulation bottom. I made my final purchases in the opening hour, but knew that it was do or die for the 17M strategy…ETE and WMB had to bottom right then and there. At first I thought I was dead on…WMB rallied from $10 to $13 in less than an hour, while ETE rallied from mid-$4’s to $5.30 over the same time frame. But then the worst possible outcome played out: both securities faded into the bell, with ETE hitting new lows for the day. This left me with no choice but to reduce exposure to the point where it would take a modern miracle to dig out of the performance hole.

 

But performance is not the sole reason for shutting down…

 

Why Goodbye

 

I need to say goodbye for a whole host of reasons – not simply bad performance. Chief among them is that I have let the 17 Mile project consume my life. I work in the business, so having 17 Mile on the side only served to compound the normal time/attention-intensive nature of the industry. And running a highly aggressive strategy only further compounds the issue…case in point recent events. It’s no way to live – and even if I were successful with the ‘strategy’ over time, I cannot spend the rest of my investment days living in fear of collapse.

 

Second – After 5.5 years of what I considered to be an investment ‘residence’ of sorts, I believed I had built a framework tailored to my own investment style. The good performance from June 2014 thru October 2015 validated my ‘style/strategy’ because it embodied the core elements of what I believed made me a ‘good’ investor. In other words, because the performance was not generated via a few lucky trades, but via a consistent methodology (what I believed to be at the time), I thought I was on the right track.

 

I do not believe my ‘style/strategy’ has been invalidated by the collapse in a couple of bad picks, but rather by the fact that I have been ABSOLUTELY DEAD WRONG on so many individual equity opinions since June 15, 2014. The portfolio I held at inception – if held thru today – would not be in much better shape than the current portfolio. And while of course it is relatively unfair to discount profits taken in the interim (i.e. VRX was $119 at inception and originally sold over $240 in July/August 2015), that ‘buy and hold’ fact is frightening.

 

In other words, I need to go back to the drawing board.

 

Third – While I would love to blame my inability to conduct really in-depth due diligence on my ‘lack’ of resources, frankly I am not entirely sure I am even cut out for it. Previous attempts have proved utterly futile, if not highly counterproductive. My ‘crutch’ to this is/was what I believe/believed to be my relatively good ‘feel’ for situations and ability to absorb opinions from those who are experts where I am not. But to be this far off in my personal judgement and judgement of ‘expert opinion’ (i.e. with recent holdings) is an enormous shock to the system.

 

Where To/Conclusion

 

The solution may be as simple as smaller position sizing and overall less aggressiveness. But A) I cannot just jump to that conclusion and start over after obliterating performance; and B) I need to readjust my investment life. It is not healthy to be this obsessed with something and do this poorly. Less time on Twitter and staring at screens, and more time getting to know businesses.

 

The blog/Twitter has been just a tremendous platform for getting to know other investors, and I plan to stay in regular touch with those I am in regular contact with. But the day-to-day – or heck, hour-to-hour – monitoring of something that is so enormously distracting as Twitter is just not healthy, at least for me. So that activity will be reduced in dramatic fashion…

 

Lastly, for the time being the blog will go dark (I’ll give it a couple of days). I need to figure out what I am doing, get into a better routine, etc; and I may use it for private documentation.

 

If we have not interacted before over email or Twitter, please feel free to get in touch at seventeenmile@yahoo.com and/or @hfm17mile.

 

Sincerely,

 

 

 

17M

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Also keep in mind that most of his holdings were hedge fund hotels. Those have been subject to relentless selling pressure.  I thought he did good work (logic wise) but that's a tough space when flows go negative.

 

Agree:  Concentrated investments in names that were both levered and very popular with hedge funds. 

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When Warren Buffett says that America's best days lie ahead

 

I completely agree with Buffett.

 

However, it's "America's best days", not necessarily "investor's-who-just-bought-whatever-US-company-stock-and-expects-that-GDP-growth-will-make-his-pick-work best days".

 

If I had to pick whether to be born in US right now (knowing nothing about the future) or any time in the past (knowing in general what will happen up to 2015, but not particulars that would make me rich), I'd pick to be born now.

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market is down like 14% and people are throwing in the towel? This is nothing in the course of a regular market.

 

I actually feel kinda bad for the guy:

 

"A mutual fund shop I became familiar with in college puts out a weekly market commentary. From what I had seen, they had a pretty strong record of “calling the market”. Soon after the March 2009 bottom, they began preaching about “bear market rallies” and the potential for “new secular bear market lows”. Having just got my “fund” back to even, I was not about to put my friends and family through another -40% decline again, no matter how little money they had with me. So I closed up “shop” and returned the money. In late 2009 I began investing my own capital again. Again, under the “guidance” of the mutual fund shop, I fully hedged my portfolio in anticipation of new bear market lows. With the wonderful addition of the likes of John Hussman, Prem Watsa and Seth Klarman to my reading docket, I would go on to endure four excruciating years of worrying about the market."

 

Hi where did you find the above quote?

 

But ya I agree with you, the guy wanted instant returns. His fund NAV went from 10 to 18 back to 10 in a little over 2 yrs.  It hardly proves anything.... Alot of people got the same type of returns...... maybe the disappointment was going +80% and blowing it all in the space of two months.

 

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When Warren Buffett says that America's best days lie ahead

 

I completely agree with Buffett.

 

However, it's "America's best days", not necessarily "investor's-who-just-bought-whatever-US-company-stock-and-expects-that-GDP-growth-will-make-his-pick-work best days".

 

If I had to pick whether to be born in US right now (knowing nothing about the future) or any time in the past (knowing in general what will happen up to 2015, but not particulars that would make me rich), I'd pick to be born now.

 

Hell yeah bro, Elon's going to colonize Mars and the Google guys are going to make us live forever.  Productivity whut?

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Frankly, I don't know him at all. So I have no penetrating insight.  I may have seen the website sometime ago, and we are all subject to human frailties.

 

BUT, to say that you have a really big margin of safety and 40 days later have to time a bottom to save your @ss?

 

Really that is no margin of safety in my book.  Plus he claims that part of his margin of safety is expertise, yet he says he has no particular expertise in oil and gas, where his concentrated bet is??? WTF?

 

It's a cautionary tale of true margin of safety, circle of competence, and ultimately over confidence and there but for the grace of god go I.

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We are possibly entering the 3rd, 50%+ bear market in just 16 years. This is unheard of or based on my limited knowledge of history.

 

While this person may have had bad picks, bad strategy, weak research or whatever, I doubt that this is the entire story.

 

When Warren Buffett says that America's best days lie ahead, he pisses me off. Is he a cheerleader, a liar?

I think that not only he was lucky to be born in the U.S. as he says but, he was also even more lucky to be born at the time he was.

 

There is no way IMO that the U.S. will ever experience again the kind of growth rate in GDP that it once did. Maybe this is due to demographics or that people have their basic needs mostly covered but, you can tell that something feels wrong.

 

Cardboard

 

Based on your assumption Cardboard (which I somewhat agree with...whether it is a 50% decline or a 35% decline, does it really matter), the best timeframe to compare would be from the 1919 stock market crash to the 1937 stock market crash. Nothing like history rhyming.

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Frankly, I don't know him at all. So I have no penetrating insight.  I may have seen the website sometime ago, and we are all subject to human frailties.

 

BUT, to say that you have a really big margin of safety and 40 days later have to time a bottom to save your @ss?

 

Really that is no margin of safety in my book.  Plus he claims that part of his margin of safety is expertise, yet he says he has no particular expertise in oil and gas, where his concentrated bet is??? WTF?

 

It's a cautionary tale of true margin of safety, circle of competence, and ultimately over confidence and there but for the grace of god go I.

 

Agree with this 100%.  Respect to 17mile because he put it all out there, but calling him a "value investor" is a bit much.  Fundamental driven sure, but used leverage, extreme concentration...  He put up amazing numbers for awhile but was clearly focused on upside, not downside and margin of safety.  I'll bet he is a better analyst than I am but value investing is about a lot more than stock picking.

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I have not met him but sent him a nice post. One of the things which distinguishes a great investor from a good investor is class, ie., the ability to empathize with someone else who is younger and has learning ahead of him, as we all do. I hope others send him a nice note. He'll recover and do fine.

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Agree with this 100%.  Respect to 17mile because he put it all out there, but calling him a "value investor" is a bit much.  Fundamental driven sure, but used leverage, extreme concentration...  He put up amazing numbers for awhile but was clearly focused on upside, not downside and margin of safety.  I'll bet he is a better analyst than I am but value investing is about a lot more than stock picking.

 

Another good point about focusing only on upside. 

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