Category: Missives

I came across a book titled The Matter of the Heart by Tom Morris that is a great history of the medical accomplishments and advances for the human heart. Mr. Morris details eleven operations and their evolutionary success over the course of the book. What amazed me in his book is how the practitioners had to take risk and balance benefits at levels other weren’t comfortable with. This duress in is not dissimilar to the pressure the markets place on the oversight of an investor’s capital. His stories have powerful implications for how we can look at other fields of study. It effects how sentiment can ebb and flow, while creativity, entrepreneurialism and passion grind on to a brighter future.

Money flowed into passive investment vehicles at an ever-increasing rate in 2017. It was a record year for these products designed to replicate a stock market index and agnostically own a basket of securities without discretion. As investors who build our portfolios from the ground up through careful security selection, we think the ramifications of this passive ideology should be revisited, as we believe its impact will be felt in our markets for the foreseeable future.

A few weeks ago, I caught myself pulled in by an old James Bond classic, The World is Not Enough, starring Pierce Brosnan. In the movie, an oil heiress, Elektra King, is kidnapped. While in captivity, she becomes a victim to Stockholm Syndrome and plots with her captor to destroy an oil pipeline running to the Bosphorus Sea. There is a scene in the movie that encapsulates where we are in today’s stock market environment

In the 2017 Berkshire Hathaway Annual Letter, Warren Buffett told us what he is doing, and, in as quiet a voice as he could use, what he says to do. Our readers will not be surprised at our summation of Buffett’s letter, but here we go anyway.

Is the underperformance by most large-cap value investing strategies in this lengthy bull market the “darkest hour” for value investors? This is the longest underperformance stretch of four relatively poor stretches for value in the last 80 years.

Long term success in common stock ownership is much more about patience and discipline than it is about mathematics. There is no better arena for discussing this truism than in how investors measure risk. It is the opinion of our firm that measuring a portfolio’s variability to an index is ridiculous, because it is impossible to beat the index without variability.

It is hard to think about 1981, my first full year in the investment business. Three-month Treasury bills were paying 18%, longer-term Treasury bonds yielded 15% to maturity and cheap stocks got 20% cheaper. In the summer of 1981, we saw a stock market decline from an already depressed market trading at eight-times after-tax profits down closer to six times. Participation in the stock market was down to 13.2% of U.S. household financial assets at the market bottom in 1982.

All major financial euphoria episodes hold aspects in common. Among our favorite books on investing is John Kenneth Galbraith’s A Short History of Financial Euphoria. More than any other economist, we admire his understanding of the connection between the securities markets and the economy.

The first time I read Forbes magazine was in 1980 as a brokerage trainee in New York City. I was fascinated by the company stories and the way the top investment disciplines were analyzed. In the 100th Anniversary Issue—published in September 2017—over 100 successful business and investment people wrote a short essay. We would like to zero in on one of these essays from Steve Case, the former Chairman/CEO/Co-Founder of America Online, Inc. (AOL).

In the Bible, Jesus arrives to help his friend Lazarus a few days after he had already died. His friends Mary and Martha were very disappointed because they thought all hope was lost. As the story goes, Jesus raised Lazarus from the dead. We bring this up because of a recent blog post at The Wall Street Journal from Wesley Gray of Alpha Architect. He asked the question, “Is Value Investing Dead?”