Bronte Capital- Comments on investment philosophy

[LounginMKL]

http://brontecapital.blogspot.com/2016/09/comments-on-investment-philosophy-part.html

 

The post made the rounds among my investing network- John Hempton is always thought-provoking.

 

What resonated with me was:

- Hard to sell research/learning activities without the performance and portfolio activities- "what have you been doing to generate return?"

- Really hard to market WEB's long-only sit-and-wait strategy

- If you have a concentrate portfolio, you better have the ability to identify quality businesses. If not, you are better off owning a portfolio of diversified crap than concentrated second-class businesses

[Jurgis]

Great article. I agree a lot with it.

 

I am probably more skeptical than he is about active managers' ability to outperform. Whether they are Buffett "phoneys" or anything else.

 

BTW, IMO even people who manage their own money have real difficult time to do "20 stock punchcard" portfolios and sit on 5-6 stocks for 5-10 years+.

[scorpioncapital]

It's an interesting article but I'm not sure what strategy he is advocating and why it's superior. If his argument is that finding 20 great stocks infrequently and resisting the desire to sell or buy more for many years is too difficult, dangerous, or boring, then perhaps a simple S&P500 index fund would provide the diversification required. Many of his strategies appear just as difficult as trying to find 20 great stocks. I mean, imagine the amount of work required to find 30-40 stocks that might be mediocre to great, trade in and out, keep an eye on it all the time, and sprinkle it with a few short positions. I've seen his detailed articles on Valeant short, that's a lot of work he's done there, how much more or less work to find a few great stocks?

 

 

[Jurgis]

scorpion, I think you missed his point completely.

 

He doesn't say that "find 30-40 stocks that might be mediocre to great, trade in and out, keep an eye on it all the time, and sprinkle it with a few short positions" is easier or better strategy. He says that it's a strategy that may earn you assets-under-management, while the 20-punchcard strategy won't.

 

Anybody has examples of OPM managers that have 5-6 positions with 1-2 trades over the last 5 years max?

 

I'll say Munger @ DJCO, but that's pretty much it. And Munger @ DJCO doesn't have to care about investors leaving because he has 4 positions that have not changed in last 6 years.

 

OTOH, by that rule even Buffett is a "Buffett phoney" ;)

 

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There are other points in his post that apply even to people who don't manage OPM. About how difficult it is to buy 5-6 positions and sit on them for ages. Once again, it's not that it's better to trade more often or diversify more. It's just that it's easier. And most of us - OK, at least I - do that easy thing.

[Picasso]

It seems like Bronte is talking more about the expectations of his capital base.  There's that whole meme "What investors think I do, what I really do" that you can either feed or nip in the butt.

 

There's a ton of value you create for yourself (as a money manager) and others by being selective with who you take on as a client.  That said, I have another take on Bronte's post.

 

The 20-card punch thing doesn't really work when you're starting a career as a fund manager.  You need to get some critical mass fairly quickly (that number is different for everyone) so that you can build fairly lengthy relationships with a core group of investors who buy into your philosophy and can give you more capital over time.  So in the beginning, you can't really afford to sit around and wait for those "20 punches" type events.  If it comes along, great, but you need to be killing it right away.  If there's an easy 20-30% return sitting somewhere, you kind of have to go for it even though it's not an amazing return.

 

But if you should be so lucky to come across that "20 punch" event, you better be willing to swing hard.  And you better be right.  I don't know how many times I've seen someone put on a great trade then start doing crazy things like put on as covered call, sell too early, start trading around it, getting nervous about concentration, etc.  Just freaking sit on a good investment unless you no longer think it's a good investment. 

 

In my opinion, I think most managers suffer from the inability to size a position and sit on their hands, along with trying to appease their capital base.  Or spreading their time across a bazillion ideas instead of trying to be really good at a few things.  You can't find a "20 punch" investment if you're too busy looking at everything under the sky.  I have a bit of that problem, but I've been trying to change that by limiting the number of companies/industries I find interesting.  The number of screens on my desk have shrunk from four down to one.  If you're going to put work into an idea, it better be good work. 

 

Anyway, I think if you can explain these things to your capital base you won't have a problem.  In fact I think they'll appreciate it.  At least the ones you want to have as clients...  You can tell a lot about a manager by the kinds of clients they have.

[Jurgis]

Thanks, Picasso. Great post as usual.  8)

 

I'm not so sure your capital base would so easily go with 20 punchcard strategy. I think with any kind of capital base you gonna lose money if your punch goes down/sideways for a long time. Though perhaps then it should not have been a punch. ;)

 

I don't manage OPM, so you might be right. Especially if you have a great record from the past and your 20-punchcard years also show good/great results.

 

 

[winjitsu]

scorpion, I think you missed his point completely.

 

He doesn't say that "find 30-40 stocks that might be mediocre to great, trade in and out, keep an eye on it all the time, and sprinkle it with a few short positions" is easier or better strategy. He says that it's a strategy that may earn you assets-under-management, while the 20-punchcard strategy won't.

 

Anybody has examples of OPM managers that have 5-6 positions with 1-2 trades over the last 5 years max?

 

I'll say Munger @ DJCO, but that's pretty much it. And Munger @ DJCO doesn't have to care about investors leaving because he has 4 positions that have not changed in last 6 years.

 

OTOH, by that rule even Buffett is a "Buffett phoney" ;)

 

----------------------------------------

 

There are other points in his post that apply even to people who don't manage OPM. About how difficult it is to buy 5-6 positions and sit on them for ages. Once again, it's not that it's better to trade more often or diversify more. It's just that it's easier. And most of us - OK, at least I - do that easy thing.

 

Nobert Lou, whose fund is literally called Punchcard Management http://whalewisdom.com/filer/punch-card-management-lp#/tabholdings_tab_link

 

Should probably point out he had a concentrated position in CTC Media position which did not do well.

 

[scorpioncapital]

He's somewhat confusing playing offense with playing defense. There is something equally wrong with sitting in cash for 10 years as there is in doing too many moves. The right balance is part of the skill.

 

The way I see it, if you're not confident in a few big opportunities, they'll pass you by - that's a mistake of omission and can be just as expensive. If, however, you are doing a few little things while waiting for the big fish, the big fish will make the other stuff irrelevant. If you are wrong on the big fish or don't put enough into it, it's a missed opportunity just the same.

 

10-20% of investors have truly outstanding skill and the other 80% are not going to get better results by hyper-activity. But most importantly, deciding you are in the 80% or 20% is critical, at least you can decide you won't play a game you're not good at. For example, my returns started improving when I realized I was making some mistakes of selection and chose Berkshire as my biggest core position. Then I added a few well chosen stocks to the other 9 and slowly removed the "training wheels" of the Berkshire position (btw, still the largest one).

 

20 punches? Well, if you start with a portfolio of 10 well chosen investments and 1 or 2 of them are wrong and you switch them out with 1-2 more and again...you're pretty close to 20 over a few years. 10 for the start, and 10 for the mistakes. I can see a case for 20-40 moves over a lifetime of investing. I can also see a case for having a separate portfolio where you play around with experimental ideas with smaller sums but don't expect it to do much. Maybe one of those experiments can become part of your core holdings.

[KCLarkin]

Well, if you start with a portfolio of 10 well chosen investments and 1 or 2 of them are wrong and you switch them out with 1-2 more and again...

 

You don't start with a portfolio of 10. Instead of diversifying across a "portfolio", you diversify across "time". Let's say you have a portfolio of 20 companies and an active investment period of 40 years. So you need to add a company every 2 years (on average).

 

2007 - UNP

2008 - SBUX

2009 - WFC

2010 - COST

2011 - BAC

2012 - JPM

2013 - AAPL

2014 - GOOGL

2015 - RR.L

2016 - UNP

 

Assuming you bet at least 20% on each idea, there isn't much opportunity cost. There is massive hindsight bias in this list. But these are all blue chips that you could have found easily on the front page of the WSJ, Barron's, or FT. You just needed the patience to wait for the right price. I just picked these to show that you don't need to wait 10 years for the next fat pitch. And you don't even need to find the next Geico, Netflix, or Amazon.

 

[scorpioncapital]

I like that plan. Thinking another one might be you take many positions but boost 10 out of them so that over time the 10 with the largest capital position are sort of sifted out. Then you can sell all the other ones. Like making a sculpture :)

[Guest cherzeca]

There are exceptions where you should not have a bias to be patient. My case would be V. I bought it not too long ago with the intention to hold for a long time. Then sharf (CEO) retires and the explanation sounds fishy to me. So I would insist that my V had a hanging chad which allows me a do over. I like the punchcard idea but no way could I limit it to one every two years. No professional photographer goes out on a shoot and limits him/herself to one shot

[SharperDingaan]

The reality is that you are applying a long term view (volatile but high compound return), but having to sell it to short term orientated OPM (stable & positive compound return). To be successful, as fund manager, you essentially have to absorb the volatility on the entire portfolio; in return for a management fee on the entire portfolio less its seed capital. It is essentially the same as Lloyds underwriting; you are being paid an investment return on your seed capital, and a 'insurance return' on everything in the portfolio above the MV of your seed capital - net of costs.     

 

The skilled investor, also doesn't actually need you. Your 'punch card' bets have made you timing & sector specific, & can easily be replicated by simply buying a convertible in the same specified sector - at the same specified time (ie: the coat-tail 'cloning'). The convertible doesn't have to be distressed either.   

 

The real question is whether this needs to be public. If you need OPM it has to be, but if its private money - both the disclosure issue, and the magnitude of the volatility take-up materiality decline. Hence the very smart money is primarily private partnerships.

 

SD

   

[Gregmal]

There is definitely a lot of truth to the statement about getting board and just "doing things" to do them. If one were Zen-like in their discipline, picking spots is really not that hard. The hard part is following the markets closely enough to find these opportunities, while not acting on anything but the highest quality ones, which could mean 1-2 trades over a 3-4 year period.

 

I'd probably even say it's easiest on the short side as every couple years or so some easily identifiable scheme gets enough exposure and gets large enough in scale that you can make a killing in a real short period of time. As far as longs go, as someone else mentioned, it seems every so often a quality name gets out of whack due to outside circumstances and creates a great long term entry. The stupidity of the selling behind JPM's London Whale comes to mind. A 6B loss lead to 35% of the market cap being wiped out, when anyone with a trained eye could have seen that there was a tremendous value investment to be made. I remember seeing GE at about $8 in 2009. Under what circumstance would GE be out of existence?