Guys Who Don't Get Beat

[Gregmal]

After reading through a few threads, particularly the SHLD and VRX ones, it got me thinking. Obviously we all take major beatings from time to time, the trick is to managing the impact of such events. This is something that wasn't really done with Ackman's VRX investment, or Berkowitz's SHLD position. The effects for both guys have been pretty devastating by any measure, but especially in terms of publicity. I can think of major positions blowing up for many guys. Watsa, Cooperman w/ SD, Pabrai ZINC, Baker Street, etc. But what about guys who haven't really had this problem? What sort of investing style have they used to avoid these pitfalls. How do they manage their positions. Obviously a major market downturn is going to have a predictable effect on performance, but the big killer is having prominent positions go bust for reasons specific to the investment rather than the broader market.

 

First name that kind of pops out for me is Tepper. He does seem like more of a trader, but he isn't afraid to be concentrated in a big idea. What managers do people follow whom don't seem to get beat big?

 

Lastly, more so out of curiosity in regards to others here, how do you personally look to avoid this. Diversification seems to help, but one look at Cooperman the last few years will show it doesn't spare you entirely. As a trader, it seems obviously a bit easier as you typically have a set of rules. But as a value investor, what rules do people use to avoid major blow ups? Do you just size it and let it ride? Do you only add under "x" scenario? Personally I've found avoiding companies with high debt loads/complicated capital structures and unpredictable earnings/consistent history of losses helps. I tend to concentrate in companies with hard assets. The downside is I miss out on a lot of tech, biotech, and even energy names.

 

Apologize in advance if this thread has already been covered somewhere. Still somewhat new here but thought it was an interesting subject given the popularity of threads relating to SHLD, VRX, and FNMA which could be another big blow up for many managers(not surprisingly both Ackman and Berkowitz as well).

[Cardboard]

It is a very interesting topic Gregmal. I think that the solution is to sell, sell, sell as soon as you see smoke with an investment or whenever the thesis is challenged, you observe an unexplained miss, bad management decision, etc.

 

As value investors we tend to anchor and that is a killer. You bought an investment that was cheap, something wrong happens and it drops say 20% and we stick around thinking that it got cheaper and this shall pass. Then usually things go from bad to worst.

 

That is something that I am not good at by the way but, need to learn.

 

Cardboard

[KCLarkin]

I think that the solution is to sell, sell, sell as soon as you see smoke with an investment or whenever the thesis is challenged, you observe and unexplained miss, bad management decision, etc.

 

Interesting that Weitz, Giverny, and even ValueAct managed to do well with VRX.

 

On the other hand, you have people like Yacktman and Russo who seem to buy such safe companies, that they rarely have big losers.

[clutch]

I agree with all of the above. Some people take "averaging down" as a means to dig themselves out of a false thesis instead of realizing that they were wrong...

[rogermunibond]

VRX took down a lot of guys including Ruane Cunniff and Lou Simpson.  Typically they've avoided blowups.

[Gregmal]

First name that kind of pops out for me is Tepper. He does seem like more of a trader, but he isn't afraid to be concentrated in a big idea. What managers do people follow whom don't seem to get beat big?

 

Tepper is different animal (much more diversified) compared to those other folks.

 

He is, but from time to time he really loads up when he sees something and doesn't often miss. The financials were his big one, but even now, AGN is a pretty concentrated position. GM a couple years ago was about 20% if I remember correctly.

 

Cooperman on the other hand is the definition of diversified and had one of the worst runs of "blow ups" I've seen from 2014-2016. SD, MONIF, S, where all fairly big and well promoted positions that all had spectacular declines.

 

Another name I'd mention in the not blowing up camp is Nelson Peltz.

[SharperDingaan]

Think of value investment as a see-saw; one end is buy and wait for mean reversion (long term view), the other end as dollars back asap (short term payback view).

 

Inherent in the long term view is the possibility of investment now, and more later (averaging down). The short term view is take the gains/dividends off the table as they occur. Hence, as a value investor, you are essentially bi-polar - long term bull, and short term bear.

 

Obviously there is degree. If you think something is imploding you're dumping, & driving price lower; but give me a compelling reason to buy - & I'll do so (WEB's purchase of GS). If you think it's temporary (BP/Gulf of Mexico), you're a buyer at some point.

 

At the extreme, you have a position entirely paid for with house money. If it pays a dividend you have a a ROI of infinity as the cost base is zero. If you sell it, welcome to a tax bill. So you margin against it instead, & use the proceeds to buy something else.

 

Point is there's a lot more going on than meets the eye.

 

SD

 

 

 

 

[rb]

I'll go with the obvious and say Warren Buffett. I believe he's explained his process over the years.

[KCLarkin]

I'll go with the obvious and say Warren Buffett. I believe he's explained his process over the years.

 

This is largely true with his public equity investments. But I excluded him because he has had blow-ups in private investments and bonds. Specifically, Energy Future Holdings. Still, on a portfolio basis, his batting average is very high.

[rb]

I'll go with the obvious and say Warren Buffett. I believe he's explained his process over the years.

 

This is largely true with his public equity investments. But I excluded him because he has had blow-ups in private investments and bonds. Specifically, Energy Future Holdings. Still, on a portfolio basis, his batting average is very high.

Yes but weren't the blowups relatively small? None of the big bets blew up.

 

I'd say that the biggest screw-up at BRK was the Gen RE purchase and even that one kinda sorta turned ok in the end.

[ourkid8]

Dexter Shoe

 

I'll go with the obvious and say Warren Buffett. I believe he's explained his process over the years.

 

This is largely true with his public equity investments. But I excluded him because he has had blow-ups in private investments and bonds. Specifically, Energy Future Holdings. Still, on a portfolio basis, his batting average is very high.

Yes but weren't the blowups relatively small? None of the big bets blew up.

 

I'd say that the biggest screw-up at BRK was the Gen RE purchase and even that one kinda sorta turned ok in the end.

[AzCactus]

Per Reuters article http://www.reuters.com/article/us-berkshire-buffett-failure-idUSN2921504820080301 this was 1.6% of Berkshire if I understand correctly.  I don't think 1.6% is anything near a blow up.  The guys who lost in SHLD, VRX and ZINC oftentimes made it a larger or their largest position. 

[nafregnum]

 

Yes but weren't the blowups relatively small? None of the big bets blew up.

 

I'd say that the biggest screw-up at BRK was the Gen RE purchase and even that one kinda sorta turned ok in the end.

 

If I remember correctly he stated in one of his letters that he's never lost more than 5% of the total on one bad bet.  He does a good job of obeying his rules #1 and #2.

[ScottHall]

Per Reuters article http://www.reuters.com/article/us-berkshire-buffett-failure-idUSN2921504820080301 this was 1.6% of Berkshire if I understand correctly.  I don't think 1.6% is anything near a blow up.  The guys who lost in SHLD, VRX and ZINC oftentimes made it a larger or their largest position.

 

I think that's the biggest lesson to take away from these blowups. A lot of times, value guys get way too sure of themselves and bet too much as a % of portfolio.

 

I am a hybrid growth investor but I know I'm full of shit; all of my positions save one are single digit holdings.

[nafregnum]

The best learn from their mistakes.  Charlie Munger says something about rubbing his nose in his mistakes.  Studying them and figuring out what went wrong in himself.

 

It's okay to be wrong.  It's not okay to stay wrong.

 

John Kenneth Galbraigh: Faced with the choice between changing one's mind and proving that there is no need to do so, almost everyone gets busy on the proof.  (In essence, almost everyone fails to really learn.)

[rb]

 

Yes but weren't the blowups relatively small? None of the big bets blew up.

 

I'd say that the biggest screw-up at BRK was the Gen RE purchase and even that one kinda sorta turned ok in the end.

 

If I remember correctly he stated in one of his letters that he's never lost more than 5% of the total on one bad bet.  He does a good job of obeying his rules #1 and #2.

Yea. Buffett loves to self deprecate about Dexter Shoe but that wasn't near a blowup. More of a bad decision. I think way more money was wasted with Gen Re. In addition a lot more could have been wasted if warren wasn't so sharp. Just imagine the derivatives desk in 08.... scary!

 

But Buffett won't slam Gen Re. Instead he harps on Dexter Shoe because it's no longer with us.

[clutch]

... but I know I'm full of shit; ...

 

IMO, this really is the key  ;)

 

[undervalued]

It is a great mistake to believe that a speculation has been unwise if you lose money at it. That sounds like an obvious conclusion, but actually it is not true at all. A speculation is unwise only if it is made on insufficient study and by poor judgment. I recall to those of you who are bridge players the emphasis that the bridge experts place on playing a hand right rather than on playing it successfully. Because, as you know, if you play it right you are going to make money and if you play it wrong you lose money -- in the long run.

 

There is a beautiful little story, that I suppose most of you have heard, about the man who was the weaker bridge player of the husband-and-wife team. It seems he bid a grand slam, and at the end he said very triumphantly to his wife, “I saw you making faces at me all the time, but you notice I not only bid this grand slam but I made it. What can you say about that?” And his wife replied very dourly, “If you had played it right you would have lost it.” (Laughter.) - Quoted from Benjamin Graham Lecture 10

 

After reading Hussman's letter a few thread back few days/weeks ago. I was thinking about the same thing. If I didn't have blow up, results would've been much better. How I interpret the above message is that, it's okay to have blow up as long as your process/logic is correct. Maybe I am fooling myself, I don't know.

[Spekulatius]

In my opinion, one should sell when the initial thesis to justify the purchase was found to be incorrect, or when adverse things occur, that have not been anticipated.

 

Just empirically, I have found that the initial stock movements, as significant as they appear to be at that time, rarely are large enough to capture the full impact of change that occurred, which means that more declines are likely.

 

I am not talking about 1c /share earnings miss here. I am talking about a significant shift, like a huge write off, and large unexpected loss, a severe decline is margins or revenues etc. that were not expected at all. If these occur, my rule is to sell as quickly as I can and then to re-evaluate.

[Spekulatius]

... but I know I'm full of shit; ...

 

IMO, this really is the key  ;)

 

Scott's shit smells better than mine. I personally love rubbing my nose in it

[scorpioncapital]

Pay up for quality.

Don't go into certain industries, avoid them all together, leave the profits to someone dumber smarter.

Don't use excessive leverage.

 

[Guest JoelS]

It is simple. Instead of trying to outsmart others in the market, we should try to out-dumb them. That is, we should avoid the standard follies.

 

The largest loss Berkshire has realized as a % of net worth is 2%. Over 50 years (50 year anniversary letter)

 

 

 

 

[randomep]

This is the key aspect of learning from others mistake that we so often here.

 

Be brutally honest, describe the activity and analyze the outcome.

 

These guys made a bet on certain companies.  The outcome is that they blew up. What happened? I see 2 explanations.

 

1. these guys were hit by a once in a hundred year storm

2. they guys f*cked up in their analysis and made the wrong bet or the sized their bet wrong

 

With so many people making the excuse of 1) I can dismiss it because it is by defintion a rare

event.

 

So that leaves 2. Why did these guys all pick these losers that blew up in a raging bull market?

Many of these guy imply or claim they are value investors. The king of value is WEB and/or

Graham.  Would these guy approve of making a bet on a commodity producer that is setting up

a new plant and hasn't yet demonstrated anything?  WEB is not a diversifier, if he had a small

portfolio he wouldn't hesitate to bet on one or two things with all his money. He said

he would've put all his money in the Washington Post in the 70's. But what is the Washington

post? It is a company trading for much less than its assets. And those are hard concrete assets.

He said he would find bidders for the Post's assets if he was in an island in the middle

of the Atlantic. That's the kind of risk profile you would bet 50-100% of your money.

On a scale 1-10 scale of risk the Post is 1, and Horsehead is a 8! You should size it

at 0.5% if you were a value investor!

 

Many of the guys OP mention are gamblers (with other people's money) in my book.

The key is from what I read about their process. Pabrai says he buys stocks that he

thinks will double in 2-3 years.  Those companies that try that do exist, but the

risk profile of those companies that I find is unacceptable to me.  Maybe there is

someone like a young WEB right now who can find those companies with acceptable

risk. But he is not Pabrai because I read his explanation for the Horsehead blowup

and I think he is either BSing his clients or he is in denial.

 

I am a average joe engineer in silicon valley. I break my back to make a few bucks

and I save it hoping it will grow to make me comfortable. I consider my portfolio

to include all of my net worth.  I cannot afford to take a huge decline in my net worth

because I don't have the energy or the time to replace it with my labour. I manage

my portfolio and sure I'd like 20% returns, but I never lose sight of the fact

that I need to firstly safely return 8-10% over the long term.  By

long term I mean 30+ years.  I don't think you can stick with a guy like Pabrai for

example for 30yrs and beat 8% per annum.

 

Someone mentioned Yacktman and I also can think of Bruce.  These guys I think

can probably return 2% over the market over 30yr (and Bruce fund has). Because

these guys know they are mortals and act accordingly.

 

 

Other the other hand I see someone like Ackman, someone on this forum says they

have a special edge and don't bet against him. edge? What significant edge can he

have or did he have when he picked VRX, Target or JCPenny? Ackman is 30 IQ points

higher than me but in the hedge fund world, that is not that special. But

he makes these enormous bets. I am not looking at his results. I am looking

at his thought process. I followed his presentations on Herbalife

and I am scratching my head, you are betting how many billions based on

that?

 

anyway.... that's how I see it and this is the end of my rant.......

 

 

 

[Uccmal]

In my opinion, one should sell when the initial thesis to justify the purchase was found to be incorrect, or when adverse things occur, that have not been anticipated.

 

Just empirically, I have found that the initial stock movements, as significant as they appear to be at that time, rarely are large enough to capture the full impact of change that occurred, which means that more declines are likely.

 

I am not talking about 1c /share earnings miss here. I am talking about a significant shift, like a huge write off, and large unexpected loss, a severe decline is margins or revenues etc. that were not expected at all. If these occur, my rule is to sell as quickly as I can and then to re-evaluate.

 

Your very last line "sell as quickly as you can and re-evaluate".  Take whatever losses you have before they become too big and have a sober second look.  Likely you can always but it back at reasonable price.  I just had to do this with Seaspan (twice).  If things look cleaner down the road, I will seriously entertain rebuying.  Its very situational though.  Wells Fargo was not one where I would sell just because they had the scandal.  I was looking to buy on weakness but apparently so was everyone else. 

 

Buffett and his Dexter Shoe is just another example of Warren trying to be humble.  He didn't lose 3.5 B, he lost the purchase cost minus whatever of the residual was left.  Acting as if there was opportunity cost is disingenious.  The whole debacle was a capital loss and entirely offset by gains that year from elsewhere. 

 

And I cant think of anyone else I know of who as made as few mistakes as Buffett.  And that is critically important and what distinguishes him from neary everyone else.  I dont see him holding Coke, WPO, or others as mistakes.

 

[Guest Schwab711]

@Uccmal: I also always liked that you didn't have to search very hard to learn about his few mistakes. I think a big part of academic growth is admitting that you are wrong from time to time. For a long time I refused to be wrong. In the last few years I've tried to make a habit of pointing it out to myself and I think it has led to a huge improvement in results (not just investing related).