In attempting to acquire and communicate wisdom from the world’s best investors, traders and even investment bloggers, the team at CSLA has a significant job on their plate. In a July 8 “Bits & Pieces” analysis they attempt to consolidate the wisdom of economic and market thinkers such as James Grant, Joel Greenblatt, Howard Marks, Ben Graham and Michael Burry among others. While we won’t use 38 pages and four volumes of reports to communicate the issues, we will attempt to pull the best of the best (on a subjective basis). If a trend is to be discerned it is keep investing simple and go against the grain.
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James Grant on emotion in markets and central bankers
Even in the age of computers and algorithmic systems increasingly pushing price activity, markets are driven by emotions, James Grant points out. To assume that a stock’s value is derived from nothing other than corporate earnings discounted by the prevailing interest and tax rates is “to forget that people have burned witches, gone to war on a whim, risen to the defense of Joseph Stalin and believed Orson Welles when he told them… Martians had landed.”
In the end markets are as efficient as human emotions, which is why at times both can be very volatile.
When Grant looks at the banking sector, it is his quote on “too big to fail” that is perhaps most on point. “Capitalism without financial failure is not capitalism at all, but a kind of socialism for the rich,” Grant famously wrote.
It is the role of banking and bankers that has changed dramatically over the last 30 years or so, which in part can be seen in the role central bankers play in markets. “Central banks have gotten out of the central banking business and into the central planning business…” But in the end “the Fed can change how things look, now how things are.”
Michael Burry goes against the crowd to find “rare birds”
Stock value is not found by investing in companies who have already been identified in the mainstream. Proper value investing is sometimes about making unpopular choices, finding that diamond in the rough that everyone else maintains is nothing more than a dis-guarded piece of rubbish.
“I try to buy shares of unpopular companies when they look like road kill, and sell them when they’ve been polished up a bit,” said value investor Michael Burry. “I will continue to seek value amid the refuse.”
While Burry was portrayed as one of the key hedge fund players in the book and movie The Big Short, he was well known to value investors before this. His investment style is to look at the counter trend, against the grain, which could be seen in his investing in illiquid credit derivatives that bet against the US housing market and firmly against popular opinion.
“I prefer to look at specific investments within the inefficient parts of the market,” he said. “The bulk of opportunities remain in undervalued, smaller, more illiquid situations that often represent average or above average businesses,” what he sometimes calls “rare birds.”
Burry is in some regards similar to Howard Marks. “Investing is a popularity contest,” he observes, but you don’t want to pick that which has already been identified as popular. “The most dangerous thing is to buy something at the peak of its popularity.”
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Carl Icahn, Joel Greenblatt and Howard Marks think the best ideas are based on understandable principles
For Carl Icahn, Joel Greenblatt and Howard Marks, the key is finding true value -- which sometimes means breaking down concepts into an understandable and fundamental thesis first. This often isn’t determined on a quarterly basis when earnings drive many investing decisions, but rather based on a long-term business model.
“I look at companies as businesses, while Wall Street analysts look for quarterly earnings performance,” Icahn said, noting the fallibility of humans at all levels. “Some people get rich studying artificial intelligence. Me, I make my money studying natural stupidity. If the system weren’t so messed up, guys like me wouldn’t make this kind of money.”
The value markets place on stocks is not always to true value, as Joel Greenblatt points out. “Prices fluctuate more than values – so therein lies opportunity,” he writes, looking for a larger meaning and then deciding it doesn’t matter. “Why do prices fluctuate so widely when values can’t possibly? The answer is I don’t know and I don’t care. I just want to take advantage of it.”
Greenblatt, founder of Gotham Capital, says trying to figure out why markets are irrational at any given moment is a fool’s game. He is like Howard Marks and other investors in that he recognizes the best ideas start with a simple premise. “I like to keep it simple.” He says value readjustments happen all the time. “It happens; it continues to happen; the opportunities are there.”
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Howard Marks, for his part, looks at complexity and financial obfuscation, so common today, with skepticism. “First-level thinkers look for simple formulas and easy answers,” he observes, saying second level thinkers sometimes embrace the complex without recognizing the fundamental issues first.
Other thought leaders note the mental state of mind required to achieve success.
Hope for the best, but expect the worst, are among the Wall Street Journal’s Jason Zweig’s rules for investing. Brace for disaster via diversification and learning market history and expect good investments to perform poorly at times – and never say always.
Perhaps the best value investor of all time has comments about crowded trades, people being sheep and when to buy and sell the “popular” trend. Although he didn’t use those terms, Ben Graham’s “The Intelligent Investor” said as much. “The intelligent investor is a realist who sells to optimists and buys from pessimists.” Graham advocated following investment policies which are “not popular on Wall Street.”