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Value investors performance in bull markets and bear markets


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I just reread Buffett's partnership letters and noticed that he repeated many times that he expected his fund to perform better, relatively, in a bear market than in a bull market. Several times in his letters, he forecasts that his results would be well above average in a declining or stagnant market, while he'd lucky if he beats a bull market. And that was his experience.


This was quite reassuring to me as I had noticed a similar pattern in my performance: while I was barely above major market indexes last year, I did much better than them in 2008 and 2007. I also did much better than the markets over the last couple of months.


However I've noticed that several value investors had a performance the other way around over the past 3 years: they did much worse than major indexes when the markets declined, but they beat them handily when they bounced back. A typical example is Monish Pabrai - his performance was abyssal in 2007 and 2008 but then he had an incredible 2009.


I was wondering if any of you had any ideas/ insights why people like Monish had such a "reverse pattern" in their performance.



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In the current downturn I think it depended on your exposure to financials and commodities and the amount of levering you feel comfortable with from both options and in your firms balance sheet.  These 2 sectors had the biggest fall and recovery.  Monish had a large commodity exposure and some financials.  I had similar performance: 2007 - +55.6%, 2008 - -49.2%, 2009 - +108.5%, 2010 (YTD) - +16.6%.  As a result, I am trying to learn from those who have done better in downturns.  (Note: I had mostly different firms on the recovery than in the decline.)



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I also think that Buffet counted on the balance sheet to reduce the down movements. If you think about it buying a company that has the following 3 attributes how much value can it really lose?


-Generates some kind of profits/FCF

-Market value around Net Current Assets

-Stable revenues


The way I have always seen it is that under normal conditions such a company should never trade below Net Current Assets. It's like an imbedded put on your stock. There is almost no more Net-Net todays for the same reason, everybody understands Net-Net, so as soon as a company trades at a discount to Net Current Assets people rush for it... sustaining the share price.


Grossly symplifying PE and Growth are going to give you the gains and the balance sheet is going to protect against losses.





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Buffet's outperformance in down years was very much a function of special situation-workouts where a deal would close and he'd make the spread within the year. It is very unlikely that net-nets, or any other general investment would have done particularly well in these bad years. As Graham wrote in several writings, in a recession or bad year everything goes down, the good, the bad, and the ugly are all in the same boat.

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just want to put this out there, you are assuming 2009 was a bull market while 2008 and 2007 is bear market?


are we in bear or bull market?


are you saying everytime market is up, buffett is up less and everytime market is down buffett is down less?



as far as i can recollect (my memory is bad) i don't think buffett is always up less then market when market is up and down less when market is down



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I like the work-out reason to explain Buffett's relative better performance in a down market. In my personal case, I tend to own lots of businesses that have very P/B ratios so that could also be the net-net explanation. I also buy put options when I see very overvalued stocks.


Re Monish, I haven't looked in details to his holdings but I thought he weighted his portfolio to more commodity-related businesses at the bottom of the market. So that could explain his huge upside last year. But I thought he also had a few low P/B holdings in his portfolio.


Hyten -


S&P rose 3.5% in 2007 (w/ decrease at the end of that year), decreased 38% in 2008 and rose 23% last year and is flat so far this year. I'm just comparing on a year over year basis.


As an aside, I think we are in a long term bear market that started in 2000. It's likely to last another 5-10 years but I can't say for sure (especially with the Fed/government interventions). I see that secular bear market as similar to the trend in 1966-1981 when the DJIA did nothing ($100 invested on 12/31/1966 was worth $100 on 12/31/1981 with annual inflation at 7% during that period...). Last year increase might just have been a rally within that long term bear market.


Yes, Buffett in his letters to partners written in the 50s and 60s mentions several times that he tends to perform better, relatively to the market, when the market is down or flattish (hence the 2007 & 2008 comparison).

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The other downside risk are taxes.  The article doesn't mention that.  I'm betting taxes eat up all of the out-performance of that strategy.


Seems to me that taxes vary so much between people/institutions/etc that it'd be hard to say much in general.  But I look forward to your book on the topic.

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