Even the Legends Are Losing in Today's Markets 34 comments
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Yikes.
If anything reveals the difficulty of investing in today’s market, it’s the fact that investing legends have been losing money hand over fist. The market has fallen over 12% in the first six months of 2008. Meanwhile, many of the world’s greatest investors have lost more… a lot more.
The Website www.Gurufocus.com tracks the investments of the world’s greatest investors. All told, it follows 55 investors, everyone from Warren Buffett to Seth Klarman, the super secretive manager of Baupost Group, who has averaged 20% a year for more than two decades and only posted a single losing year in the bunch.
All told, only four of the 55 made money during the first six months of 2008. Let that sink in for a moment. The best of the best are losing money. Some of the biggest names in the bunch—guys like Marty Whitman and Eddie Lampert—are trailing the market by as much as 20%.
The ten worst performers were:
| Legend | 6 Month Performance |
| Marty Whitman | -43% |
| Mohnish Pabrai | -41% |
| Bill Miller | -37% |
| Joel Greenblatt | -37% |
| Eddie Lampert | -28% |
| Robert Bruce | -25% |
| Bruce Sherman | -24% |
| Charles Brandes | -24% |
| Robert Rodriguez | -22% |
| Mark Hillman | -21% |
Are these guys secretly idiots, guys who simply got lucky for a few years but really don’t know what they’re doing?
Maybe. But I doubt it.
You can underperform dramatically for a number of years and still maintain an average that beats the market over time. Richard Pzena, an investing legend in his own right, spoke about this in his 1Q08 conference call. Since the inception of his firm, Pzena Capital Management, Pzena has outperformed the market by nearly 4.5%. Here’s what he had to say about down years:
A very simple strategy, buying the lowest price-to-book stocks over the past 50 years based on the cheapest quintile of the largest 1000 stocks would have resulted in a return of about 200 times the initial investment versus about 60 times for the S&P 500. But along the way, there were 8 times you would have lost 20%.
As Pzena notes, by buying the cheapest, largest stocks in the market, you would outperform the S&P 500 by nearly threefold. However, even by focusing on the deep value portion of the market, you would still experience eight years when you’d lose 20%.
So while investing legends may be having a tough year, I have little doubt they’ll bounce back quickly. Often times the greatest test of an investor’s ability is not what he does when he’s up, but what he does when he’s down.
And I wouldn't want to make a bet against these guys.
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This article has 34 comments:
Think of a simple experiment. Stadium full of people. Everybody flips a coin. Tails you sit down, heads you keep flipping.
After several flips you would notice that some people are still standing. Yet more flips a couple of idiots are still there! Incredible! Must be the best coin flippers in the world!
I am talking of course of the survivorship bias. We don't hear of most market participants. They aren't on "gurufocus" or on CNN. They aren't writing books about how they lost 10% every year for 20 years. Most of them don't anyways. And when they do we don't read their books, unless we are suicidal. Yes, skill plays a role. But we can't judge that skill simply by looking at their performance. How can one judge a skill? First, you have to define what that skill is, exactly. Beating S&P 500 isn't a skill. It's a dream.
Skill is being able to do something quite specific.
We no longer know this. The landscape has suddenly changed and a strategy that embraces low price/book will put names like Washington Mutual, LEH, C, BAC, and FNM in your portfolio.
The problem with applying rule-of-thumb investing is that they work in some economic environment, and not in other environments.
We are in a completely new landscape. The asteroid has hit. The dinosaurs are dying. Small mammals are coming on the scene.
The winners in the future will be those animals that adapt (er, companies) to the totally changed environment--but not the same as the winners of the past.
Think about this: Treausuries are a great investment, risk free, until they are not.
Real estate is a great investment, until its not.
Gold is a proven horrible investment, until its a great investment....
Commodities are too risky and volatile for the average investor, until they are they are not.
Technology stocks are great growth vehicles to invest for the long haul and retirement...until they are not.
In each case: a rule of thumb that is true in one economic environment becomes not true in the next environment.
Markets are evolutionary. Rather than applying rules of thumb to investing, like Bill Miller who puts no credence in the markets when it comes to oil or commodities, and has his thinking tied to 80's and 90's examples of what should work, it is better to ask the question:
What is the economic environment we are in and what asset classes will do best therein?
Every study is a logical chain that can be reduced to following a few rules of thumb, usually a lot less than the those doing the studying would let you believe. Think mortgage paper buyers . . . their rule of thumb was "real estate always goes up". They gave birth to an entire industry of people who's rule of thumb was "those guys are idiots". Guess we know who had a better rule but again, only in rear view mirror. I'm sure you can dig around and find people who explained why this paper wasn't worth 99% of the face value 5 years ago. Some of them made their bets and lost. Then there were people who made those same bets 4 years ago and lost again. Then 3 years ago. Only the ones lucky enough to made and stick to these bets in the last couple of years came out ahead. For the market isn't a judge telling you who is right and who is wrong but a voting public that can be as stupid and wrong as anyone else and indeed often is for very long periods of time.
have you heard the expression that even a blind squirrel can find an acorn once in a while? it's one of my favorite sayings that keeps me honest about my own investment acumen. i don't "expect" 15% a year. what i do expect is to never have a losing year and i have invariably kept that pledge to myself (with occsional exception) by not being greedy and being willing to take small losses before they turn into big losses. lots of broke friends of mine had great years when great years were commonplace and mistaken for investment acumen. then they got buried.
if you've had a good run, congratulations. i'll even attribute it to your investment acumen. but it would be considerably more impressive if, rather than telling us what worked in the last 6 months, you tell us what will work in the next 6 months. feel free to post it here.
CWEI LIFC PVA SGY COG
DGLY BEXP SQNM DMLP GENC
APWR CEDC PRGO MANT PTNR
MEE MTL IPHS SVNT SM
AUXL GEOI TWTI FLIR
APPX ILMN JRCC RBN
CPST GOLD ICLR PBR
AXYS SQM TTES ATVI
GMXR CHIO TELOZ PQ
PMFG ZEUS VLNC SYT
I knew he was down, but good gawd not that far down.
I would think this would ruin his name forever, but why do I think that in '09 (or whenever) when his stocks rebound 30%+ CNBC will be treating him as the top guru again. I seriously doubt they remind everyone that it'd take almost 2 years at +30% to get back to break even. And that's just to recoop 2008 losses.
Brokers are sometimes hung up on their own glory and usually work only in large cap US companies - and those are, and will continue to be, hit hardest.
time for the smaller caps, no doubt..
wcvarones.blogspot.com...
He has underperformed the S&P 500 for the past 1, 3, 5, and 10 years.
I wouldn't bet against these guys long term and now is probably a great time to dip your toe and start averaging in to some of the hardest hit value funds. Aside from Miller, the other guys have been purchasing on the way down so I suppose they still consider them "high conviction positions". As long as they've done their homework and the B/S's are strong enough to survive the current turmoil, I bet each of these guys are poised for quite a turnaround once the market gets through it's gyrations.
it is my view that we will not weather this storm in the conventional sense. our financial system is structurally broken, with the old model of expanding, cheap credit no longer viable. repairing it through traditional means, e.g. low interest rates, deficit spending, tax rebates, etc. are arguably as harmful as they are good. new tools, e.g. federal reserve lending and swapping of good currency for bad, strike me as panic moves and i think the gold and currency markets, and the surge in oil...even in the face of global economic slowdown...suggests as much.
it will take recapitalization of our major financial institutions (which is ongoing) and ultimately a contraction of credit at a higher price before confidence will return. to me, this spells severe recession if not worse.
unless you have speculative capital, which most don't, i would not make a major bet that is unhedged. indeed, i believe the reason the market is not down substantially further is because there are many vehicles to use to hedge long positions in stocks and they are employed far more today than in years past.
preservation of capital is the most important consideration with the kind of markets we have today. greed kills.
ANTS:
i admire your bravado. i agree that you have to be flexible here. i'll take a look. i wish you the best.
I am scared.
I have been watching this tragedy unfold since 04 when I ran across an article by Dr. Steven Leeb, who had tracked the performance of stocks vs the price of oil over thirty odd years and came up with a startling conclusion for the day, which was documentation that when oil goes up sell stocks, when oil goes down buy stocks and you will outperform the DOW by 100%. Listening to Ken Defeyyes was equally informative, and now I watch the talking heads on CNBC etc struggling to put the recent market activity into context that they understand.
For a smart group, they are sure being dumb, to put it bluntly.
The loss of cheap oil is going to shatter our economy, no doubt about it, and if we're lucky Obama will listen to some of the smarter people in the room, T. bone and Matt Simmons come to mind, and bust ass to get this train back on the track. We have to drill everywhere, and pursue the alternatives and coal to liquids with sequestration in what little time that buys us.
I'm making more shorting this market than I ever did on the way up.
I'm long gold and oil option calls and Sears Holding puts. for happy trading.
I don't know what we'll trade when the Dow goes to 2000.
Heuristics are informal rules of thumb that may overgeneralize and work for a long time, until they don't work, because the initial conditions have changed.
Clearly stated (I hope) There is a difference between a heuristic and an algorithm.
The former, thanks to Wikipedia: "A heuristic is a method to help solve a problem, commonly informal. It is particularly used for a method that often rapidly leads to a solution that is usually reasonably close to the best possible answer. Heuristics are "rules of thumb", educated guesses, intuitive judgments or simply common sense."
In more precise terms, heuristics stand for strategies using readily accessible, though loosely applicable, information to control problem-solving in human beings and machines.[1]"
Algorithms are different:
"In mathematics, computing, linguistics and related disciplines, an algorithm is a sequence of instructions, often used for calculation and data processing.
It is formally a type of effective method in which a list of well-defined instructions for completing a task will, when given an initial state, proceed through a well-defined series of successive states, eventually terminating in an end-state.
The transition from one state to the next is not necessarily deterministic; some algorithms, known as probabilistic algorithms, incorporate randomness."
Markets are semi-random, dynamic, and adaptive aggregations of data that reflect real world phenomenon. (e.g.--peak oil, moeny supply growth, company earnings, interests rates).
An investor must use models that take into account the facts on the ground, so to speak, or the economic environment, to put it another way.
Ok, so what. Everyone knows this...
Bill Miller says that Peak Oil is hooey, and that oil and commodities are a bad bet going forward.
I say hes wrong.
Soros says were in a new macro environment, with huge implications going forward.
Presumably we've all read the same (or sufficiently similar) set of data, and looked at the same reports (or similar).
One of us will be right.
The judgment required to make the decision about whether this is a valid theory (peak oil) , or bogus one is largely algorithmic. As is the investment policy that follows such an assessment.
My question: Why would Mr. Miller "bet the ranch" that the theory is wrong? Is he not assuming that he is 100% correct?
What if you said: "I don't know the future, and I know I can be wrong. My readings suggest to me that peak oil is probably a real phenomenon that will drastically alter the investment landscape in my lifetime. I, put the probability at 75% that this is the new macro-environment going forward, and 25% that it won't be proven correct, at least in my lifetime, and that 25% that oil prices will be lower in the next ten years. "
How would such and investor invest?
Is is random and luck? Is it all rear view mirror watching?
If you beat the market with concentrated bets in the oil sector is that random, thus requiring no skill?
If you lose big in the financial stocks because you erroneously believe that the turnaround is around the corner, is that bad luck? Or poor performance?
What is performance?
Yes. They also make their own news when making buyouts, ie Lampert with Sears and Kmart so they can control their outcome compared to the average joe.