Flame-outs

[tede02]

Apparently Paulson has been getting killed in recent years:

 

https://www.nytimes.com/2017/05/01/business/dealbook/john-paulsons-fall-from-hedge-fund-stardom.html?mabReward=ACTM1&recp=4&action=click&pgtype=Homepage&region=CColumn&module=Recommendation&src=rechp&WT.nav=RecEngine

 

It seems like I read these types of articles regularly.  I just read something similar about Jack Meyer who used to run Harvard's endowment.  Ackman and Berkowitz's struggles have been covered pretty well on this board.  Eddie Lampert, Kyle Bass...  Who else can we add to the list?  I know there a lot more. 

 

It really is remarkable how so many of these guys who, at one time or another, are considered geniuses, and then they just seem to flame out.  It seems like the common factor is they string together a few years of good performance, or have a huge payday from something like the housing crash, attract a bunch of money, and then cannot reproduce. 

 

I'm just kind of rambling here but this trend never ceases to amaze me.  It demonstrates how difficult (if not impossible) it is to identify asset managers that can truly outperform over time.  It also demonstrates how unique someone like Buffett (with a 50+ year record) is.

 

Looking forward to Berkshire weekend! 

[TwoCitiesCapital]

Apparently Paulson has been getting killed in recent years:

 

https://www.nytimes.com/2017/05/01/business/dealbook/john-paulsons-fall-from-hedge-fund-stardom.html?mabReward=ACTM1&recp=4&action=click&pgtype=Homepage&region=CColumn&module=Recommendation&src=rechp&WT.nav=RecEngine

 

It seems like I read these types of articles regularly.  I just read something similar about Jack Meyer who used to run Harvard's endowment.  Ackman and Berkowitz's struggles have been covered pretty well on this board.  Eddie Lampert, Kyle Bass...  Who else can we add to the list?  I know there a lot more. 

 

It really is remarkable how so many of these guys who, at one time or another, are considered geniuses, and then they just seem to flame out.  It seems like the common factor is they string together a few years of good performance, or have a huge payday from something like the housing crash, attract a bunch of money, and then cannot reproduce. 

 

I'm just kind of rambling here but this trend never ceases to amaze me.  It demonstrates how difficult (if not impossible) it is to identify asset managers that can truly outperform over time.  It also demonstrates how unique someone like Buffett (with a 50+ year record) is.

 

Looking forward to Berkshire weekend!

 

I don't know Paulson's strategies as well, but 2016 was the first time in 9-years that value stocks outperformed growth. So if you're look at renonwed value investors and suggesting they're not as smart as you once thought they were, it helps to look at the environment that they traditionally operate in. Value stock returns have been dismal - all of the returns have gone to a handful of companies at the top.

 

You can make the argument "they should have adapted", but most that I know that adopt the value framework do so because they know it outperforms over the long-haul and don't try to switch into momentum/growth & value. So, in an environment where the universe of stocks you typically choose from underperforms for 8-9 years in a row, I'm willing to give the value guys a little more room to understand underperformance with the expectation that it comes around and value will likely outperform for the next few years going forward.

 

 

[stahleyp]

To echo what Two said, with few exceptions, most value managers have gotten killed the past several years. They also looked like idiots in the late 90s. The questions then becomes, did they lose it (ie markets are more efficient now) or are markets a little wonky due to all the stimulus? I think it's some of both.

 

I've been anti Paulson for a long time. He had one great year...with someone else's idea! Though, he's a billionaire and I'm a guy chatting on a message board, so take what I say with grain of salt. His lack of research on Sino Forest showed a lot to me. He's a decent investor but not great. He had a middling track record before the housing crisis and middling now.

 

 

[Uccmal]

There aren't many who haven't reverted to the mean, or worse. 

 

In Fund management it is very hard to maintain a good record.  Just when you need the money most to invest, is when your unit holders pull out.  We can probably list fund managers on a couple of hands who beat the markets for more than a decade and exited the business on a high note: John Neff; Walter Schloss; Peter Lynch (IMO he got out before his record would have tanked) , Bill Gross.  Seth Klarman has done well. 

 

Running a business and identifying a moat is very hard.  Most businesses are just not that lucrative. 

 

Buffett is so good because he innovates and adapts.  He has always stayed ahead of the curve.  He was the first to make use of insurance float in a big way to invest in anything other than bonds.  Dozens have copied and no one has done as well.  After he discovered that, he moved into buying control positions in businesses that generate cash, and then moat businesses.  He has an entire philosophy that he has evolved around investing, a circle of competence, and business.  It is not duplicable or copyable.  Anyone else alive can only hope to do above average, but less than Buffett. 

 

Obviously there are single businesses that have done as well or better than Berk. such as MSFT, Apple, but just not as long. 

 

 

[BG2008]

Can you explain this one a bit more? "Peter Lynch (IMO he got out before his record would have tanked)" 

 

I think Peter Lynch is a very underrated.  29% CAGR is very impressive when you buy hundreds of names

[stahleyp]

Not to steal Al's thunder, but a few reasons Lynch got out at the right time.

 

The US entered a recession in 1990. Who knows how he would have invested then?

 

Back in the day, Fidelity was the world's largest fund manager. Before Regulation FD, they also had a lot of access to information unavailable to the public (or at least early). Look at their funds now. They are still better than the average mutual fund but not churning out 15%+ outperformance for diversified funds.

 

Mean reversion is (usually) a real thing. Look at Bill Miller. He beat the S&P 500 for 15 years - straight! His performance starting around 2007 was so bad it destroyed his long term record. I think he actually underperformed if you look at his entire career on Legg Mason Value Trust.  Look at Ken Heebner. He absolutely killed in up to 2007. Peter Lynch-esce. He had an even larger outperformance against the market for around a decade vs Lynch's best decade.

 

I don't think he would have tanked, but this who 29% returns would have looked probably closer to beating the market by a little over a longer stretch of time.

[Williams406]

I don't know the answer to this, but it would be interesting to see how Lynch's returns were distributed. When he started in the late 70's, he ran a small fund. Later, it was large. Did he post massive early returns and begin reversion as fund assets grew? It wouldn't surprise me. Overall performance for him is remarkable.

 

 

[Uccmal]

Not to steal Al's thunder, but a few reasons Lynch got out at the right time.

 

The US entered a recession in 1990. Who knows how he would have invested then?

 

Back in the day, Fidelity was the world's largest fund manager. Before Regulation FD, they also had a lot of access to information unavailable to the public (or at least early). Look at their funds now. They are still better than the average mutual fund but not churning out 15%+ outperformance for diversified funds.

 

Mean reversion is (usually) a real thing. Look at Bill Miller. He beat the S&P 500 for 15 years - straight! His performance starting around 2007 was so bad it destroyed his long term record. I think he actually underperformed if you look at his entire career on Legg Mason Value Trust.  Look at Ken Heebner. He absolutely killed in up to 2007. Peter Lynch-esce. He had an even larger outperformance against the market for around a decade vs Lynch's best decade.

 

I don't think he would have tanked, but this who 29% returns would have looked probably closer to beating the market by a little over a longer stretch of time.

 

No thunder stolen Paul.  Pretty much what I was thinking.  John Neff and Schloss both went decades with 15% plus returns for shareholders. 

[Gardener]

At the risk of asking something dumb, why would anyone give $400 mio dollars to a university? There must be a reason besides vanity, no?  ???

[Jurgis]

At the risk of asking something dumb, why would anyone give $400 mio dollars to a university? There must be a reason besides vanity, no?  ???

 

Why not?

 

If I had $$$B, I'd consider donating to university. Might not be the best place to donate money to (I'd probably talk to Bill and Melinda instead), but not the worst either. There's a lot of progress in our lives that came from university research.

[Read the Footnotes]

At the risk of asking something dumb, why would anyone give $400 mio dollars to a university? There must be a reason besides vanity, no?  ???

 

You are on to something there.

 

When the assets available to donate are large enough and/or the expected future tax liability is large enough, there are various trust techniques and giving options that can result in someone being wealthier with a more diversified, less risky source of income by having "given it away" than by having kept it in their own name. The wealthy have a way of buying such beneficial legislation.

 

If you are wealthy enough to be concerned about such things, you might want to consult with an estate or trust attorney. The tax advantaged wealth preservation can be so advantageous as to be a viable retirement vehicle option in addition to an estate planning option.

 

The best part of this is that the donor can gets credit for their munificence through public recognition while the average person has no clue that the donor may have enriched themselves in the process.

[Spekulatius]

Maybe, these guys with good looking track records were not that good to begin with, just lucky. Since there are so many entering and exiting the field, some ought to get lucky. With investing, it is  hard to distinguish luck from skill with investing, a track record of a lucky, but unskilled manager, might look the same this thread track record of is skilled investment manager. I probably takes a along time (> 10 years for sure) to distinguish skill from luck, just based on track records.

 

Another possibility is that some of those with skill over time get fat and lazy and are just not that good any more.