Post 2300 — On Business Issues

Every 100 posts or so, I take a moment to think about the broader aspects of what I do.  As a blogger, my goal is to educate, and I think I have covered many issues well here.

As an asset manager, my goal is to serve existing clients well.  Most of my assets under management stem from value investing, and 2013 has certainly been good to my clients and me.  2013 has made up for 2011-12, and then some.

What has surprised me is how existing clients have added to their assets with me.  I expected growth to mainly come through new clients, but at present, most is coming from existing clients.

Another thing that surprised me is that a number of my clients said have said something like this to me, “I really appreciate that you don’t press us to give all of our assets to you.  But you help us as if you have all our assets.”

I know that I have to do marketing, but I don’t like it, and so I do as little of it as possible.  Part of it is the unpredictability of investing.  I have a good track record, but does that really mean I will do better than the index in the future?  Markets are fickle, and much more is due to favorable providence than most of us imagine.

All of us say, “Past performance is not indicative of future returns,” but few of us truly act as if we believe it.  How many consultants  will bring forth managers that are underperforming but have good prospects?  Isn’t the proof in the pudding?  Past may not be prologue, but it is incredibly difficult to get in the door with those who advise individual and institutional investors if you don’t have a winning track record.

Why is that?  Secretly, everyone believes that “Past performance IS indicative of future returns.”  Success breeds success, right?  The man with the hot hand will remain hot, no?

Sadly, no.  Though momentum effects sometimes work in the stock market, there is no evidence for manager outperformance persistence, outside of Graham-and-Doddsville.  But you can’t get naive buyers to think otherwise.  Almost all individual and institutional investors choose managers at least partially on past performance.  That’s the sad truth, and all the disclaimers in the world can’t change that.

I am grateful for the trust my readers place in me.  I am grateful for the trust my investors place in me.  And I hope that I never disappoint you badly.




  • Gil Meriken says:

    It would be more accurate to say “Past returns are not necessarily indicative of future returns, but they may be.” That’s not as catchy, but I hope it would lead the investor ask “if past returns aren’t indicative of future returns, then what is?”

  • Gil Meriken says:

    (continued) And under what conditions are past returns indicative of future returns?

    • The quick answer is that they *aren’t* indicative, but most consultants and investors have a hard time hiring someone who hasn’t been leading the market.

      The longer answer is that of Buffett’s: The Superinvestors of Graham-and-Doddsville. Value investing underperforms for short periods, but pays off over the long run. You have to identify a factor that will mean-revert that will come back, like value, or maybe momentum.

  • TimP says:

    In my case, past performance continues into the future until the point where I actually make and investment. Then it all goes to the dogs!

  • Greg says:

    David — there are many value investors out there, why do you think Buffet is more successful than others? His explanation in “Superinvesters of Graham-Dodd” revolved around monkeys randomly picking stocks, but what if one group of monkeys (eg the value monkeys) always prevailed…

    Where are the other value monkeys? For example: Susquahana Fund lists Berkshire as one of its biggest holdings (and most of the others are the same as Berkshire’s major holdings). That isn’t a separate monkey / independent example. The Susquahana monkey is imitating the Berkshire monkey (or Berkshire is imitating Susquahana).

    Also curious about your thoughts on one of Berkshire’s biggest investments, Wells Fargo. Here is an LA Times article suggesting WFC is just as aggressive as all the other money center banks:,5,888851.story

    How come Wells Fargo was concentrated in California, one of the big real estate bubbles of the US — yet they magically avoided every problem? It sounds too good to be true.

    Here is another story about Berkshire’s new investment, H.J. Heinz. Apparently Heinz new owners (aka Berkshire and 3G Capital) have decided to slash healthcare benefits to retirees:

    And lets not forget that Buffett wants everyone else to pay higher tax rates … but he is donating his own fortune to the Bill Gates foundation. Do as I say, not as I do…

    I think Bill Gross gave a much better explanation for certain monkeys showing extraordinary success: they had the right investment process at the right time. It was a lot easier to make money trading bonds during the biggest bond bull market in US history than during the previous few decades.

    During the recent two decades, very few stocks sold at a discount to book value — almost none actually. The total market cap of those that did were not enough to scratch the paint on something the size of Berkshire. Ben Graham’s investment tactics (as practiced by Graham himself) would not work in 1990-2013.

    Buffett’s investment style depends on massive debt expansion. He is a distressed asset investor, sometimes called a vulture investor when others with a smaller PR department do it. Buffett’s big advantage is that he borrows at zero percent (the float on insurance premiums).

    We can argue whether Buffett recognized the debt binge trend and exploited it — or was he just lucky. His political connections clearly gave him a massive advantage — both in getting legal inside information and avoiding prosecution that would have (and did) destroy competitors.

    Without his political connections, without an expanding debt bubble — Berkshire’s biggest successes would not have happened. And several of his missteps (Salomon Bros Treasury scandal, the GenRe derivatives mess, the Sokol insider trading scandal within Berkshire itself, Buffett’s incredibly lucky exit from his FNMA shares just before it blew up in the tax-payers face.

    How much of Buffett’s success is really attributable to the time he lived in (the debt bubble), and how much was political connections?

    Because if it was merely value investing, then we should see several more examples of value investors with his level of success. He was far from the only value investor out there in 1970-present. Where are all the others?