The Growth and Value Managers and Investors Conundrum

The great conundrum for traditional asset managers (of which I am one) is how to explain irrational market movements. Only longer term managers seek either growth or value, or a combination of both. However we are now in a market where those traditional investment themes are being obfuscated by hedge fund managers and short term momentum traders.

Take what happened to Ospraie Management, LLC as an example. The Ospraie Fund which had $2.8 billion in the beginning of August lost a reported 26.7% of its value during that month in the wake of a “substantial sell-off” in energy, mining and resource equity stocks. There is no doubt in my mind that Ospraie was leveraged and controlled far greater than $2.8 billion of equities. Now it is liquidating and closing up the fund. Ospraie is not alone.

All that a hedge fund manager will do in these circumstances is close the fund because the company will not earn its performance fee, which typically is 20% of the fund's profits. Many of these managers will open up a new fund with a similar investment format in a few years, thus wiping out the performance deficit and starting from a zero performance benchmark. A prima facie example is John Meriwether, who after blowing up Long Term Capital in 1998 started JWM Partners in 1999 and has lost a sizable percentage of its assets this year.  

So who suffers? In the short run it is the value and growth investors who see their investments being whipsawed without rational explanation. When your stock falls 10% in one day, is it really worth 10% less or is a leveraged liquidation taking place without concern for price? What do you do?

Perhaps you should follow the advice of two of the best investors of our time, Berkshire Hathaway’s (BRK.A), (BRK.B) Warren Buffett and Charlie Munger.  They are less concerned about short term movements and can see the forest for the trees. They will stick to their value oriented approach with the full knowledge that the markets and their investments will not rise each and every year. They know that there are some down years and some periods of time when irrational behavior will grip the markets.  Shares of BRK.A are down over 15% this year. Buffett and Munger don’t have to worry about performance fees. They will stick around and survive. In fact, they are on the prowl for good investments right now. Ask yourself this question – would you fire Buffett and Munger right now knowing that they are off about 15% in 2008?

If the answer is yes then I suggest that you do not invest in the securities markets.  If the answer is no then you have made a conscious decision, and in my opinion the correct one, to focus on the long term benefits of active growth and value investing.

Disclosure: None

Comments

[Bud Labitan:]

Scott, You might enjoy "The Four Filters Invention of Warren Buffett and Charlie Munger." It explains and honors the intellectual partnership of two brilliant men. www.amazon.com/dp/0615...

2008 Sep 04 10:25 AM