It’s extremely common to hear investment commentators talk about “growth” and “value” as though they are polar opposites. But Validea CEO John Reese says not to buy that false notion.
“When it comes to investing’s great ‘either/or’ – that is, the growth or value debate – you can have your cake and eat it, too,” Reese writes for Canada’s Globe and Mail. “That’s because the great growth versus value debate is, in fact, a false choice. … Confining yourself to either value stocks or growth stocks is only limiting your portfolio’s potential. At certain times, you’ll be able to find more attractive growth-type picks; at other times, the market will be offering more value-type plays. Having a portfolio of growth-focused and value-focused stocks can also help smooth your returns over the long haul, since the two styles take turns leading the market.”
Reese says the “fallacy of the growth-versus-value notion goes even deeper. … That’s because implicit in the debate is the idea that any given stock is either a value stock or a growth stock, and that’s just not true.” He highlights a pair of stocks that currently get approval from the growth strategy he bases on the writings of renowned quantitative investor James O’Shaughnessy — and a separate value strategy he bases on O’Shaughnessy’s writings. One of them: AXA, a Paris-based financial company that’s involved in life insurance, property and casualty insurance, asset management and banking.
Jim Rogers, known for the 4,200% gain he and partner George Soros secured over a decade in the 1970s, told a Barron’s interviewer that he sees a significant bear market coming.
“In America we’ve had economic setbacks every 4 to 7 years since the beginning of the Republic and chances are that we’re certainly getting closer to being due . . . and the next bear market is going to be worse than most of us have experienced because the debt is so much higher.” He also noted that right now “is the first time in recorded history that you’ve had all the major central banks printing staggering amounts of money.””
When asked about recommendations for commodities investments, Rogers was very positive on agriculture: “It has been a nightmare industry for a long time and that’s got to change. I would certainly buy agriculture.” After discussing other possibilities, he summarized: “I would buy agriculture with both feet, energy with a toe, and watch the others.”” Regarding currency investments, he noted “my largest currency is the U.S. dollar,” continuing, “I expect some problems going forward in the world financial markets . . . as the turmoil comes, the U.S. dollar will go higher and higher.”
Liz Ann Sonders, chief investment strategist with Schwab, believes the bull market will continue. She points to:
- The lack of new net inflows into equity mutual funds (unprecedented in a bull market like the current one);
- The S&P has crossed its 50-day moving average more than 50 times so far this year (much higher than earlier in the bull market);
- Stock buybacks may be supporting rises in stock prices;
- The Fed is signaling a slow tightening of interest rates, which historical data suggests produces higher returns than a fast tightening;
- The economy has added 13.5 million jobs since the financial crisis.
Purported contrary trends, such as a potential profits recession, may be explained in ways that do not contradict a bull market, Sonders suggests. Declining profits, she says, are mostly concentrated in the energy sector.
Earlier this month, Barry Ritholtz of Ritholtz Wealth Management suggested in his Washington Post column that amateurs may be able to beat professional investors. Countering Charles Ellis’ suggestion that amateur investors are seriously disadvantaged as amateur football players would be against the pros, Ritholz opines that amateur investors “have enormous advantages of their own.” He says investors “can jiujitsu . . . benchmarks, costs and fees, size, and career risk” that restrict professional investors and, thereby, achieve better results on their own. Each point is highlighted below.
- Benchmarks: Ritholtz notes that comparisons to benchmarks, as well as related marketing considerations, can undermine the pros. “You,” the amateur investor, “can feast on Beta instead of starving on Alpha,” he says.
- Costs/Fees: Ritholtz describes finance industries fees as “an egregious drag on returns,” noting that “you can keep your [costs] cheap, while the pros cannot.”
- Time: “You can have much, much longer-term time horizons” than professional investors, according to Ritholtz. He suggests that “being able to think long term and have patience is a luxury the professionals do not enjoy.”
- Career risk: Ritholtz observes that career-related considerations for investors in most investment firms incentivize them to “manage risk very conservatively.” Partly for that reason, professional investors’ “own interests may not be those of their clients.” While professionals are restricted by the criteria that can influence their careers, amateur investors “get to set [their] own metrics.” He suggests the amateur has “an enormous advantage” in this regard, recommending, “figure out what your long-term financial goals are, then create a plan to achieve your objectives,” measuring success by progress toward the goals.
How do Apple, Facebook, Berkshire Hathaway, and other market giants stack up against the strategies used by history’s greatest investors? In his latest column for Forbes.com, Validea CEO John P. Reese takes a look at how 10 market titans fare, and the results might surprise you.
Reese notes that, historically, small stocks have beaten large stocks by a significant margin. Small stocks have an advantage because they can fly under the radar in a way that larger stocks cannot, and they usually come with an added risk premium because they tend to be less stable and more susceptible to bankruptcy. But, he says, that doesn’t mean you should ignore the big guys.
“Mega-cap stocks have advantages of their own,” Reese writes. “Their size and name recognition can give them what [Warren] Buffett would call ‘durable competitive advantages’ over their competitors. They also tend to be less volatile and safer plays during tough times. … And often times the big guys will offer nice dividends or implement major share buyback plans because of their more stable cash flows, making up for the slowing of growth that inevitably occurs when a company gets to be as big as these firms.”
So how do the 10 largest companies by market capitalization score using Reese’s Guru Strategies, which are based on the approaches of Buffett and other great investors? Apple, for one, fares quite well, earning strong interest from Reese’s Buffett- and Peter Lynch-based models. Facebook, on the other hand, misses the mark. To see how the others stack up, click here.
A letter by Brian Spector of Baupost, encouraged and endorsed by the firm’s iconic value-investing president Seth Klarman, gives a rare inside look at this secretive investment firm. As Business Insider reports, Klarman asked Spector, whom Klarman describes as “an outstanding investor, collaborator, and mentor,” to write a letter directly to the company’s investors as Spector announced his retirement after a 17-year tenure.
Spector described two types of investing: “needle in a haystack investing” and “tide comes in, tide goes out investing.” According to Spector: “Most of the time we are in periods of haystack investing,” meaning “we sift through lots of investment ideas to find a few decent opportunities. We sell more securities than we buy and our cash reserves begin to build.” Occasionally, such as at the end of the dot com bubble, the markets “become significantly dislocated” and the “tide” changes. This is when Baupost seizes opportunity: “We see distressed sellers, illiquid securities, huge redemptions, and an excess of paranoia and fear. We quickly find a number of interesting opportunities, deploying our significant cash balances as we trade precious liquidity for mispriced securities. We may lose money in the short term, as we add to our portfolio while prices are dropping. But when markets turn, we expect multiple years of strong profitability.”
The approach appears successful. With net gains of $23.4 billion since its 1982 inception, the Baupost is ranked among the world’s top-performing funds.
Spector points to several factors that underlie success:
- He describes a “culture of patience,” noting “when we don’t find interesting ideas, we do nothing and hold cash.” He continues: “On the flip side, when an idea has been analyzed and is fully baked, we drop whatever else we are doing, discuss the investment, and make a decision. Our portfolio decision process must be incredibly efficient, as we recognize that good ideas are scarce and may prove fleeting.”
- Spector observed that most within the firm “believe we have generated [out-performing] returns BECAUSE of th[e] cash” it holds. Without it, “it would be impossible to deploy capital when we enter a tide market.”
- Spector credits the firm’s culture of teamwork (as opposed to internal competition) and mutual confidence among its members. “This is an area that I believe makes Baupost exception,” he says. Unlike firms where investors act as “free agents” who are rewarded on the basis of an individual “book” of investments, Spector says Baupost investors “work together to maximize the returns for our clients . . . they comfortably make hand-offs [by giving investments to others in the firm based on expertise], root for one another, and try to help in any way possible. This means reviewing investments, exchanging impactful information and opinions, as well as mentoring one another.”
- Finally, he explains: “We try to maintain a calm working environment. . . . At Baupost, if you were in our trading room, you would not know if the market was up 5% or down 5%. This is by design. It is much easier to make reasoned decisions without someone screaming at you or second-guessing your judgment.”
All of these points seem to support Spector’s discussion of the firm’s success as a product of “tide investing.” He notes: “Investing in tide markets takes chutzpah. To do so effectively, you need to fly in the face of public opinion, you have to fight normal human emotions, and you have to be prepared to double down on your bets when your conviction is most in question. . . . But most importantly, you have to be at a place that empowers you to succeed – a place that is uniquely situated to take advantage of these market conditions.”
In the second part of our highlight of Barron’s “Art of Successful Investing” conference, we find a number of interesting investment themes, predictions and new ideas from top investing experts.
Oscar Schafer, manager of the hedge fund O.S.S. Capital Management (which he has since announced will close), noted “we run a concentrated portfolio, with just 12 to 15 long positions and 15 to 20 short positions.” He identifies several lesser-known companies with significant potential for increasing valuation. For example, he points to ownership and management at Par Pacific Holdings as a reason to view the company optimistically.
Jeffrey Gundlach, founder of Doubleline Capital, discusses potential value in market pockets. For example, of Puerto Rican general obligation bonds he says, “Bondholders will either have a home run and be paid 100 cents on the dollar, or the bonds will be restructured and you’ll make 75 or 80, which is close to your cost.” Although he observes that “energy bonds are the riskiest because the fundamentals are bad,” he notes “if you’re going to buy them, I want you to buy 30-year treasury bonds also, because they will work well together.”
Finally, Sarah Ketterer, CEO of Causeway Capital Management, explains why she thinks the recent emissions cheating scandal makes Volkswagen an attractive stock. She says that after the fines and related outlays are paid, the company will restructure massively. “The catalyst to cut costs is here,” she believes. This fits well with what she described as her “original investment thesis,” which was to “find the company with the greatest amount of fat to cut.”