Last week, Finance Twitter erupted over a Bloomberg article about Michael Burry[i] and how he likened passive investment in equity markets to the bubble in the synthetic CDO market back in 2007, which he famously – thanks to Michael Lewis and Christian Bale – identified.
Some of you may remember the quant crash of August 2007. As Andrew Lo wrote in his initial diagnosis, “losses were initiated by the rapid unwinding of one or more sizeable quantitative equity market-neutral portfolios…which then put pressure on a broader set of long-short and long-only portfolios.”
For a fundamental, value-oriented investor, we are reasonably active in the management of our portfolio names. This is by design, and on purpose. With a concentrated, best-ideas-only portfolio, it is imperative that we shed any anchoring biases and constantly challenge our theses. This leads to idea and portfolio turnover.
This is going to be an uncharacteristic departure for me. This story is deeply personal, for our family, and for our oldest son in particular. But it is a story he’s letting me tell, because it is a story he wants people to hear.
We manage a concentrated portfolio of investment ideas. We, essentially, try to be objective about identifying specific instances where Mr. Market may be overreacting or underreacting to particular fundamental phenomenon.
Disruption in the auto industry is a very hot topic. The embers started burning back in 2005 when Tesla dropped a powertrain into a Lotus Elise, then things started heating up in 2012 when Google drove a Prius across Nevada, without a driver; and then they started blazing in 2014 after Uber did a valuation round at $18 billion.
Following on our last post “The First Step to Regaining Credibility” we wanted to quickly highlight that the difference between the fee structure of a large, diversified, purportedly active fund and a smaller, concentrated, active fund.
We are not big fans of market timing. Those that profess to have such a skill before the fact often always turn out not to have had much skill in hindsight. Of those that do turn out to appear to have skill, that was actually supposed to happen.
The S&P is down nearly 20% since the 20thof September, turning a lovely and respectable 11.2% total return YTD into an excruciating 10.4% loss. In Europe, the pain has been even more severe. In the UK, the FTSE 100 is down 14.8% YTD; meanwhile the French CAC 40 is down 14.7%, and the German DAX 30 is down 21.9%.
October unleashed a storm upon financial markets. Here in Europe, we hadn’t had one since Brexit, but had many before then, and will surely have many more. Bad weather is a feature of investing, and as the stewards of long-term capital, we need to balance action and inaction during these bouts of market turmoil.
As we wrote in “Half-hearted is half-minded – December 2017” we aren’t big fans of dipping our toes in the water when entering a position, nor of timidly reducing when exiting. If we are right more often than we are wrong, it might feel better to inch in or inch out of a position, but it is a suboptimal strategy.
Benjamin Graham is considered by many as a founding father of value investing. Upon a re‐read of the seminal Security Analysis, which he and David Dodd first published in 1934, one learns that many of Graham’s insights were not simply confined to balance sheets and income statements. In fact, he devoted a significant effort to such topics as psychology, overreaction, under‐reaction, and the consensus view.
Following on the tweet below by President Trump, there is again a lot of discussion of the merits of quarterly reporting, potential corporate short-termism, and the impact it might have on managerial decision-making.