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cstauffer

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  • It's A Stock Picker's Year [View article]
    Larry,

    Please comment if you are so inclined on the mutual fund run by my mentor from my early years in the business. The fund is CCASX. When I worked for the lead manager of this fund he was underperforming for several years in a row in the late 90's because his fundamentally driven stock selection process would not allow him to participate in the dot.com mania that was driving the market. He kept telling me not to be concerned about under-performing during a market like this because it will result in a very bad ending for those who are playing that game. By the way, that would have included passive investors. Looking back over the last 1,3,5 & 10 year periods his actively managed stock picking has allowed this fund to best its benchmark and peer group materially in all time periods. I could not be more proud to have learned from someone like this.
    Nov 21 10:33 AM | Likes Like |Link to Comment
  • It's A Stock Picker's Year [View article]
    Hi again Larry,

    I don't know if I can have any affect on how you characterize stock selection, but I will try. I really wish that you would not classify picking stocks as a loser's game in absolute terms. I agree that most people will fail at picking stocks, but even you have to admit that some people can "pick stocks" very successfully. I personally do not think that they have a god given ability, but instead that they do the hard work necessary and have the temperment to go against conventional wisdom and hold strong convictions. I agree with much of what you say, but I think to be fair you should qualify a statements which seem to indicate that you don't believe that anyone can be good at buying low and selling high when it comes to stocks. Obviously some people can identify under-valued companies, otherwise there would be no M&A activity. Identifying under-valued companies is not rocket science, however pinpointing when that under-valued situation will turn around is where many investors fail because they lack conviction, they instead are really just guessing and because of that they are weak-handed investors and get scared out of their investments. Thus they fail.
    Nov 21 12:01 AM | Likes Like |Link to Comment
  • It's A Stock Picker's Year [View article]
    Larry,

    My definition of trying to beat the market is first defining the market, then attempting to add value by either under-weighting or over-weighting individual securities, sectors, industries, or asset classes. I personally think that attempting to do that is mostly futile and a guessing game that very few people can be successful at, especially in any consistent manner. Many very smart people have tried doing this in the name of sector rotation, global macro, etc. and their records are inconclusive at best. Just look at Ray Dalio's performance this year.
    Nov 19 12:16 PM | Likes Like |Link to Comment
  • It's A Stock Picker's Year [View article]
    Hhmiles,

    Excuse me Larry, I thought that I would jump in on this dialog briefly. Hhmiles, outperforming the market is not what a "wealth management" client is paying for IMO. You may have noticed my dialog with Larry on this thread and I am an active asset manager, therefore one would think more inclined to try to "beat the market" than someone like Larry. From what I gather from hearing Larry, he provides a valuable service for most investors who are inclined to seek out professional investment/financial planning services. Seeking out someone to beat the market is a trap that many investors fall into. Most investors do not need to assume the risk inherent with the game of trying to beat the market. If an asset manager's objective is to try to beat the market every year, this will lead the asset manager to highly market correlated investments and thus an assumption of a market level risk. This leads a portfolio manager to over-weight what the market over-weights and under-weighting what the market under-weights, thus in 1999 one would have had to been significantly over-weighted in technology stocks and in 2007 one would have had to have 20% + in financial service stocks. If an asset manager has the freedom to pursue an absolute return commenserate with what a client needs to successfully execute on a client's financial plan, one could have significantly under-weighted technology stocks in 1999 and not be worried about under-performing the market in the short-term.
    Nov 19 10:35 AM | Likes Like |Link to Comment
  • It's A Stock Picker's Year [View article]
    Finding the appropriate benchmark is the key and I have yet to do that given that I hold so few stocks and they range from a stock as small as United Online (a special situation stock), owned over the last 15 months until recently sold, FaceBook, owned since March, Microsoft, owned for four months earlier in the year from $25 to $35, Greenbrier, owned for 10 months, LIFE, owned for over a year and sold recently after it was acquired by TMO, CELG, owned for over a year and still holding, Tesla, owned for two months from $44 to $85, and SBS, owned for four years until sold earlier this year. These were are a sampling of very successful holdings, but as you can see they range from small-cap, to Mega-cap, to speculative, to large-cap growth, to international mid-cap value. I don't discriminate, just look for value or misunderstood situations and I stick to an objective buy/sell discipline. All of these were bought without any pre-conceived notion of how long they would be held, but with the intention to hold them until we deem that they are no longer under-valued or until certain indentify catalysts occur.

    Regarding your bond strategy, that would not be of any interest to me because I do believe that high quality highly liquid bonds are priced extremely efficiently. Even when it comes to bonds, I search for value, therefore I tend to source the type of bonds that institutional buyers are not active in. I have the luxury of doing this because I can buy small lots and I have the skills to analyze the bond structure because in past life I was trained as a credit analyst.
    Nov 17 07:32 PM | Likes Like |Link to Comment
  • It's A Stock Picker's Year [View article]
    Larry,

    Thank you for taking the time to respond. I admittedly have not read any of your books, although I know several people who have and they are highly recommended. You would be surprised to know that I have recommended quite a few prospective clients to contact Vanguard and work with one of their advisers. I personally believe most investors are better served by low cost passive management, however where we depart is that I do not believe that most mass affluent ($1,000,000 to $3,000,000) or high net worth investors ($3,000,000 to $10,000,000) are served well by passive investing. We probably agree that the vast majority of all investors who are paying active management fees/wrap fees to own a diversified portfolio actively managed funds, or separate accounts weighted most heavily toward U.S. large-cap are not receiving any value at all. I have carved out a small niche regionally and run all-cap, all-style, global concentrated equity portfolios and special situation individual bond portfolios most focused on non-rated municipal bonds. I also allocate 20% to 30% of most portfolios to non-traditional areas such as real estate and private equity through non-traded vehicles. My clients do not measure their portfolios against market benchmarks, but instead the focus is on a "personal benchmark", which reflects an average annual return which we agree will enable them to meet their long-term goals.

    Again, thanks for your time and I did enjoy reading your post.
    Nov 17 06:46 PM | Likes Like |Link to Comment
  • It's A Stock Picker's Year [View article]
    Larry,

    As Swensen notes, in his argument that security selection can indeed play in important role in performance outcomes, what about a one stock portfolio, or a 5 stock portfolio? One certainly has to admit that in each of these cases security selection is extremely important in return outcomes. You can attempt to measure an all-cap, all-world, style agnotic concentrated portfolio that is actively managed, but I contend that you will have a very difficult time doing so. Most of the investors that I admire, Marty Whitman, Peter Lynch, Mario Gabelli run largely uncontrained strategies that do not attempt to track any particular indices, but instead focus on long-term value creation. The asset management industry has largely conformed to the model that you speak of that is concerned with style boxes, R squared and tracking error and this is exactly why the vast majority of actively managed mutual funds have very little active share, thus are essentially closet index funds doomed to under-performance.
    Nov 17 12:57 PM | Likes Like |Link to Comment
  • It's A Stock Picker's Year [View article]
    Larry, on the point of not believing in owning individual stocks, if every investor adopted that believe we would cease having a functioning market. It is the price discovery provided by the buying and selling of individual stocks which creates a market and make being able to by entire asset classes and index ETF's and funds possible.
    Nov 17 10:39 AM | 1 Like Like |Link to Comment
  • It's A Stock Picker's Year [View article]
    Larry,

    It is likely that you and I will disagree on many of these points, not because your incorrect in your data or I am incorrect in my ascertaion. The real reason that we will disagree is the fundamental premise. I follow a small universe of fundamentally screened companies and I witness how much the prices or market caps of those companies fluxuate each day. On most days they do not fluxuate based on company specific information, they fluxuate based upon their stocks being bought and sold for non-fundamental reasons (systematic risk), beta, whatever you would like to call it. Like Buffett, Whitman, Gabelli, and Lynch, I buy shares in a company that I have valued. Many times that value is significantly different that its value on the public market. You believe that the market prices in all available information and that market prices are accurate reflections of the value of a company, I do not believe that. I base my belief on what I have experienced and also the fact that if your premise was right, there would not be any premium paid when on company purchases another. A private market transation such as an acquisition that way I look at it is a true "market" value for that company as a whole. The aggregate summation of the value of the shares of publicly traded company or the market cap, is in many cases different from what someone like Warren Buffett would pay for that company if he bought it, many times it is over-valued and infrequently it is under-valued, this is why this is hard work. This is also why Buffett talks about buying when others are scared, because it is during those times that under-valuation is more prevalent. I do not believe that that market prices stocks well based on fundamentals because there are far too many non-fundamental buyers of publicly traded stocks and they are setting prices. These "investors" are not investors at all, they are buying and selling based upon sector rotation strategies or technical analysis, not fundamental valuation criteria, thus mis-pricing is prevalent. By the way, when Swensen is discussing his ascertain that security selection can be a significant driving force in performance, he is not taking about the Yale Endowment. The Yale endowment is far to large to avoid owning too many securities. The argument that he makes is a sound one and my experience has proven that out. Your argument always comes back to proper measurement of beta. The problem that I see in relying on the measurement of beta is that beta at the individual security level is not static and if a portfolio is not purposely following an indice, assigning a beta or a standard deviation as a baseline is virtually meaningless. You can come up with a beta or standard deviation based upon an asset allocation of passive baskets of stocks representing certain parts of the market, but if I as the portfolio manager am so eclectic and concentrated as to not fit into such a proxy, than the measurement is flawed.
    Nov 17 10:31 AM | Likes Like |Link to Comment
  • It's A Stock Picker's Year [View article]
    Larry,

    Congratulations on a well written article! I am an active portfolio manager, but on many of your points I agree with you and believe that passive management is absolutely the way to go for most individual investors. That being said, for investors who are fortunate to have accumulated millions of dollars to invest, I strongly believe that value can be added, not just alpha generation from security selection, but alpha from the active management of correlation risk. My one criticism of this article is that it seems to focus on measuring the effectiveness of active management in one year increments. My experience indicates that many equity active managers have out-performed the vast majority of their peers and relevent benchmarks over long periods of time (10, 15 and 20 years). For most of these managers, alpha was generated being contrarian, valuation oriented and long-term focused, not chasing benchmarks annually. David Swensen has written much in support of low-cost passive management, however if one reads what he is saying closely, he is saying that passive management is best for most people because actively managed products tend to be over-priced and also these products (mutual funds, etc.) tend to be over-diversified. I am paraphrasing here, but what he has written is that security selection is not a meaningful component of return for most active managers because those active managers own too many securities and weight them so similar to their benchmarks, that statistically they have become their benchmark, just with a 1% fee. I have been managing money for 15+ years and have taken what Swensen says to heart and manage equity portfolios with no more than 30 securities, researching them and buying them when they are under-valued and out of favor most of the time, and selling them when they are near a fair value and have become more widely favored. This can work very well, it is a lot of work, but it does not produce highly index correlated returns year to year. During some periods this type of strategy can under-perform benchmarks for multiple years at a time and then it can perform substantially better for a couple years.
    Nov 16 06:40 PM | 3 Likes Like |Link to Comment
  • Sabesp: Steady Three Month Decline Provides 37% Upside Potential [View article]
    Tom, I had bought and held this company's stock since 2010 before selling them ealier this year. You will not find the reason for the stock's decline in the backwards looking annual report. The reversal in the shares were due to concerns about not being able to win rate increases going forward sufficient to provide ROI on investments similar to what has been done in the past. Here is an Barron's article speaking about these concerns: http://on.barrons.com/...
    Aug 22 02:35 PM | 2 Likes Like |Link to Comment
  • Tesla: Mr. Musk's Wild Ride At Your Expense [View article]
    Elon Musk on Friday during his CNBC interview stated that Tesla would have been successful without government support and incentives, however it would have taken much longer. He reminded his interviewers that speeding up the development and adoption of new technologies is exactly what government support of these technologies is designed to do.
    Jun 2 10:23 AM | 4 Likes Like |Link to Comment
  • Tesla: Mr. Musk's Wild Ride At Your Expense [View article]
    bwmaki,

    You are correct that when you strip out the various government subsidies the company would not yet be profitable in Q113. However, the profit quarter is not the sole reason that the stock has risen so dramatically. These subsidies have been in place for years and they have not been able to post a profitable quarter. The enthusiasm over the company's profitability was driven by the volume of Model S's sold and the forward guidance for annual volumes and profit margins. The Model S is an undeniable market success and that success and the success of the future Model X is very promising with the expansion of the Super Charger network.
    May 25 10:18 AM | 2 Likes Like |Link to Comment
  • Tesla: Mr. Musk's Wild Ride At Your Expense [View article]
    Mr. Pirrong,

    There are example after example throughout the history of our great country of private/public partnerships which enabled new technologies to shape the course of our economy and tranform our country in an irreversable manner. No example is more significant than the creation of the trancontinental railroad made possible by the issuance of government bonds and government land-grants to railroad companies. This partnership opened up the entirety of the United States to vast numbers of people and expanded commerce opportunities. There is absolutely nothing wrong with government assistance to entreprenaurs who take on significant risk when they attempt to leverage an emerging technology which will be inherently unprofitable for years until economies of scale are created through expanded adoption. Let me give you another pertinent example which has improved the lives of people all over the globe and that is government scientific R&D, for example the mapping of the human genome. Who knows maybe someday your life will be saved by a medication or therapy made possible by this government investment.
    May 23 02:43 PM | 2 Likes Like |Link to Comment
  • Bill Gross channels Paul Krugman? "You've got to spend money," says the Bond King, arguing Europe and the U.K. have erred by pursuing fiscal austerity. "Bond investors want growth much like equity investors," he says. If austerity leads to recession, credit spreads will widen whether or not a country is able to print its own money. As of the end of March, Gross' BOND ETF had one-third of its assets in Treasurys, the highest level since July. [View news story]
    Bret, I am not sure how you calculate that spending is up $1T annually since 2007, when our deficit is projected to be less than $800B this year. You are correct that the original 2009 stimulus did not necessarily stimulate sustained growth, however it was intentionally not designed to do that. It was designed to get funds into the economy as quickly as possible in order to stem the economic plunge that the country was in the midst of at the time. The sustainable growth stimulus has been proposed many times over the last couple of years and each time those efforts were blocked by the House of Representatives.
    Apr 23 11:41 AM | 1 Like Like |Link to Comment
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