I edit more and write less these days, but even when I do write I often forget to link to it here. I’ll try to be better in 2021.
One thing I wrote recently generated an unusual amount of reader email, split about 40-60 between congratulatory and outraged. I said that star fund managers are to be avoided and I used the example of Cathie Wood, whose main exchange traded fund at ARK Invest grew assets by 1,000% last year and gained nearly 160%. She bet big and won on hot stocks like Tesla and biotechs that benefitted from Covid-19 speculation.
I am apparently a misogynist or don’t understand her genius or both. Anyway, the evidence is pretty strong that jumping on the bandwagon once a fund manager graces magazine covers isn’t a great idea whether that manager has a “Y” chromosome or not. You can read more about managers like Ken Heebner and Bill Miller in my book.
The column starts out with a “famous last words” puff piece from The Motley Fool titles “Move Over, Warren Buffett : This Is the Star Investor You Should Be Following.”
So read the headline on a year-end article from retail investing advice site Motley Fool touting the performance of fund manager Cathie Wood. Variations on the “Buffett is done” theme have been around since at least the tech bubble, while the cult of star mutual-fund managers goes back to the 1960s. Such commentators have eventually eaten their words.
Ms. Wood is a savvy businesswoman, but is she a savvy investor? Stock picking skill is very rare and even harder to discern when the manager is riding a hot category. In a bull market propelled by dumb retail money, everyone is a genius. It takes many years to establish whether success is random. And, as I point out, star manager’s performance is often worse than random on the downside. The most promising active funds are those that lagged their peers recently or got a low rating from a firm like Morningstar.
Fund managers are often compared with dart-throwing monkeys. That might be too flattering for those who get the most attention. Hot funds’ performance is often worse than random on the downside. A regularly updated study on the persistence of investor performance from S&P Dow Jones Indices shows that just 0.18% of domestic equity funds in the top quartile of performance in 2015 maintained that through each of the next four years—less than half what one would have expected by pure chance. And of course most actively managed funds lag behind the index to which they are benchmarked because of fees and taxes.
Anyway, the tone of the emails has made me more convinced that some investors in “disruptive innovators” have lost touch with reality. Congrats if you were early — the fund’s performance is pretty impressive (see chart below) — and be careful if you were late.
Warren Buffett ’s 89th birthday is a good occasion to revisit a question that has been weighing on financial minds lately—what price to put on Greenland. As far as we know, President Trump hasn’t contacted the Oracle of Omaha on the question of valuation, much less negotiating tips. But one of Mr. Buffett’s earliest letters to investors has an interesting way to think about such outlays. He quipped that Queen Isabella of Spain, who gave Christopher Columbus the equivalent of $30,000 to find the New World, could have instead invested it at 4% interest and had $2 trillion by 1963—nearly $18 trillion today. Denmark spurned an offer from President Harry Truman of $100 million in 1946 to sell Greenland. It is unlikely that a then-17-year-old Buffett, already a budding value investor, would have made the offer. The same sum invested in the S&P 500 would have compounded since then, with dividends reinvested, to a whopping $163 billion.
Denmark may have missed a huge opportunity, but don’t judge too harshly—the future author of “The Art of the Deal” was only born that year.
I was thrilled to see that my upcoming book was reviewed this weekend in Fortune Magazine and even more so when I saw that the reviewer was none other than Roger Lowenstein. He’s one of the most accomplished financial journalists around, the author of several books I’ve enjoyed, and also a former Heard on the Street columnist like me.
I was perplexed when I started to read the review, though. The first 264 words – as long as some entire book reviews – were about Benjamin Graham, the father of value investing, mentor to Warren Buffett, and a man I mention several times in Heads I Win, Tails I Win. After that he finally got to my book and said a couple of nice things.
He wrote that “Jakab has plenty of sensible advice” and that my writing is “anecdotal and witty.” But that’s where the praise ends. Lowenstein laments that the author, “a former security (sic) analyst … spends many pages debunking the idea that investors should try to time market breaks (he aptly likens this to astrology). He devotes not a paragraph to how one might estimate the future profitability of a business…One does not learn how to evaluate stocks. One learns that value investing has worked, but not why.”
While a more positive review would have made me happier, the weird thing was that Lowenstein really seemed to want to have read an entirely different book – one that taught my mostly mom and pop audience how to value stocks and beat the market. The premise of my book, though, is that this is mostly a wasted exercise, whether you try to do that yourself or pay some clever broker or stock picker to do it. My own work as a securities analyst and overwhelming academic evidence support this.
But the weird thing is that he invokes Graham. I guess Lowenstein isn’t familiar with the great man’s final interview in 1976 in the Financial Analyst’s Journal, the year he died. Here’s the money quote:
I am no longer an advocate of elaborate techniques of security analysis in order to find superior value opportunities. This was a rewarding activity, say, 40 years ago, when our textbook “Graham and Dodd” was first published; but the situation has changed a great deal since then. In the old days any well-trained security analyst could do a good professional job of selecting undervalued issues through detailed studies; but in the light of the enormous amount of research now being carried on, I doubt whether in most cases such extensive efforts will generate sufficiently superior selections to justify their cost. To that very limited extent I’m on the side of the “efficient market” school of thought now generally accepted by the professors.