Division In the Ranks?

As much as I’d love to tackle the infighting among the Democrats, I’m actually referring to the divergence among some prominent value investors. Whitney Tilson, of T2 Partners / Value Investing Insight / the Value Investing Congress / Financial Times, posted a piece on Seeking Alpha about a possible dead-cat bounce in financials. In it, he mentions the fact that some well-known and highly respected value investors (Whitman, Pzena, Miller, Nygren, Dremen, among others) are on the other side of this bet. This is something I’ve also been pondering lately and here’s what I wrote in the comments section:

“Having read books by both Dremen & Whitman as well as a few interviews with Miller, Nygren, I kinda get the feeling that these guys are a little locked into their playbook right now — i.e. buy beaten-down financials cause they always bounce back. Maybe they’re right, but will the same old moves always work? Isn’t this somewhat analogous to if Warren Buffett always bought newspaper stocks when they get killed because look at how the Buffalo Evening News and Washington Post paid off for him?

Perhaps markets and economies evolve and some investors don’t adjust as fast as others. This month’s Smart Money has a face-off with David Dreman and Bruce Berkowitz about whether financials are a buy (Berkowitz is bearish). If you examine Berkowitz’s portfolio at the beginning of this decade, you’ll see it peppered with financial companies whereas now, it is weighted more toward natural resources.”

There is also another post solely on the subject of Bill Miller and his lagging performance of late. I was impressed (though not entirely convinced) with Amit Chokshi’s comment. Admittedly, this is a bit of “gossip” and probably irrelevant to making sound investments but I was struck by an interview I read in the FT a few months ago with Bill Miller. Here were the comments that flagged my attention:

‘ Mr Miller has to delve back even further in time to find parallels for commodity stocks, a sector he believes will suffer in the year ahead as sectoral leadership changes.

“The last time that prices of commodities were at these valuations was in the mid-1950s. They underperformed the market by 1,000 basis points a year for the next five years. It’s a low probability that commodity stocks will continue to lead. Either prices curtail demand or the global economy slows, which curtails demand.” ‘

I can’t say for sure if I respect Bill Miller because of his investing acumen or because of his track record but in either case, it’s hard to disregard comments coming from someone with his pedigree. But I seriously questioned the basis of his reasoning here. “Low probability” based on what? Most readers of this blog know I’m bullish on commodities for very fundamental reasons. Miller’s approach sometimes seems more akin to a blind bet on odds than on fundamental analysis. As an analogy, in Texas hold ‘em poker, you can bet safely that statistically, your opponent most likely does not hold 2 aces. But does that mean you should play every hand as if your opponent doesn’t hold two aces, especially if he’s staring you in the face and raising like he does?

Was Miller’s foray into Bear Stearns avoidable? Was Pabrai’s tryst with Delta Financial? Is there a price to be paid if you ignore the macro picture too much? After all, Warren Buffett and Lou Simpson profess to read a gazillion newspapers a day — I’m sure they’re not looking for stock tips. Maybe having a solid grasp on the macro picture helps the investor in bottoms-up evaluations. After all, eventually a judgment has to be made on a company’s future business prospects, which are affected by the underlying economy in most cases.

It’s an interesting question to ponder.

More on this topic (What's this?)
Why It Matters That Value Stocks Are Outperforming Growth Stocks
QE Stimulus Bubble will Burst
8 Rules for Picking Perfect Value Stocks
Read more on Value Investing at Wikinvest

One Response to “Division In the Ranks?”

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