What we’re reading (7/5)
“And the No. 1 Stock-Fund Manger Is…” (Wall Street Journal). Morgan Stanley’s Dennis Lynch nabbed some big gains in the last 12 months. Per Lynch: “Our strategy has been to collect a portfolio of unique companies that have a strong competitive position and offer big growth opportunities over the long term. We don’t try to make any shorter-term predictions.” That’s a sensible strategy, but it’s awfully broad and could describe hundreds of companies. When it comes to stock selection, the devil is in the details, and we’ll go ahead and go out on a limb and say Mr. Lynch is very unlikely to replicate his performance next year—tough to do it when your strategy is “trust our subjective judgment, we pick good stocks” instead of “we apply a bias-free model to stocks in a broad universe and rigorously test that model against the available historical data.” Like monkeys randomly clacking on a typewriter, with enough monkeys and enough time, eventually one will clack out the Iliad.
“With Department Stores Disappearing, Malls Could Be Next” (New York Times). Malls still exist?
“Keep Running!” (Collaborative Fund). This is a really important article, and one we may devote an entire blog post to because the concept it articulates is fundamental to the way we value stocks and fundamental to why we think Wall Street broadly systematically mis-values stocks (side note: we aren’t total Wall Street outsiders—we cut our proverbial teeth there and know how IB analysts are trained and, by extension, how almost the entire hierarchy at many long-short equity hedge funds was trained to value stocks). The punch line: probability of extinction/bankruptcy (both in nature and in business) is basically independent of age—there is no “safe” age at which you can feel comfortable the business is sufficiently “on top of it” to be inoculated from big risks. Alternative punch line for the finance crowd: if the return on new invested capital in your model is not assumed to converge to the cost of capital because of competitive pressures, you’re modelling stocks wrong.
“How Well Has Socially Responsible Investing Performed? (Charles Schwab). Socially responsible investing (SRI) is definitely “in.” But, according to Schwab, and despite the insistence by some that SRI funds actually outperform other funds, their performance is pretty much the same. But that may be good enough with the added utility that comes from actually feeling good about your investments (unlike your airline investments, which definitely don’t fit the SRI bill in our opinion on account of (1) consuming fossil fuels with reckless abandon and (2) treating their customers like shit).
“John Paulson, Who’s Effectively Been Running A Family Office For Years, Makes It Official” (Dealbreaker). Paulson & Co. is returning all external capital and converting to a family office. Paulson struck gold in the 2008-09 crisis. Another example of “old”-style investment funds—that rely on winning once or twice without providing investors any basis to think they can do it consistently—making way for newer, better uses of capital
