On Money Managers

“Benjamin Graham was the rare academic who was both a theoretician and working practitioner. At a personal level, Graham was a caricature of the absent-minded professor, a devotee of the classics, a student of Latin and Greek, and a translator of Spanish poetry who could dress for work in mismatched shoes and who evidenced little interest in money. But intellectually his curiosity was unrivaled. When he graduated from Colombia in 1914, he was offered positions in English, Mathematics and Philosophy. He took the advice of the dean and went to Wall Street. He treated money management as a discipline as rigorous as the Euclidean theorems he had studied in college. Ultimately he became the father of a new investment movement.” As described by Roger Lowenstein.
Isn’t that your favorite financial nerd or what?

I find myself very lucky to be surrounded by money managers, to see them practice their craft and be able to learn from them.
I have worked with managers with different skills and different backgrounds, some using top-down strategies others bottom-up. Some working late, others preferring to start early. I found out that there is but one universal truth about money managers and it is that they all love to read.

As Warren Buffett said: “By the age of 10, I’d read every book in the Omaha Public Library with the word finance in the title – some twice.” Today, he still spends more than 6 hours a day reading.

There is no secret to becoming a great money manager; it takes hard work and a lot of curiosity. Curiosity, if not the most admirable trait in a person, one the most commendable characteristic a human being can have.

John Neff said money managers need, “Perseverance, sympathy for the woebegone, frugality, stubbornness and integrity, together with an inclination to flout convention and a penchant for rigorous analysis. “ He was maybe talking about money managers but this would be a good starting point for everyone.

In a nutshell, a PM job is to be curious about the world. From the impact of a new technology on an industry to the change of mood of the masses, they need to know it all, and nothing less than predict it.

PM need to have an unbiased view of the world. They need to understand geography, history as well as economics, politics, math, philosophy, and psychology. They continuously fight intellectual battles, battles against the market. Markets that are frenetic and unpredictable! Survival of the fittest is at its peak in portfolio management. One either performs or is dismissed.

To put it in perspective here is a little story about a well-known scientist. Newton lost all his savings, around one million and six hundred thousand British pounds (about $2 million) in the 1720 South Sea bubble.
Of his loss, Newton said: “I can calculate the movement of the stars, but not the madness of men”

The most famous of all, is of course Warren Buffett. Buffett’s job is to find companies with strong fundamentals, good management and easy to understand business model and invest in them. That’s it. That is all he does. Easy to understand yet so hard to replicate. $1000 invested with Buffett in 1965 would be worth 6 Million dollars today.

“I call investing the greatest business in the world because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike on you. There’s no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.” Warren Buffett

Others like Jim Rogers, Prem Watsa, Philip Fisher, Benjamin Graham, John Templeton, John Neff, Seth Klarman… are mostly unknown to the world. In their circles, they were/are not defined by their investment philosophy but by their consistency, patience, thoroughness and convictions.

I have certainly learned a lot from them all. From how to value a business to how to stay apart from the crowds. More importantly I have learned self-discipline, independent thinking and trying to overcome my own biases.

Finally, I have found in one of Martin’s Capital Management letters a very nice description of these exceptional people:

“I am particularly attracted to those who have the courage of their convictions, the willingness to stand apart from the crowd, and the chutzpah to question conventional thoughts championed by people in high places with minds that don’t match their elected or appointed position”.

So next time you meet a money manager don’t ask him/her what stocks to buy. Ask about the world! You’ll surely be surprised by what you learn.

Georges Boustany

PS: Here is an excerpt from The Snowball that explains Buffett’s success.

(His passion for money management) had led him to study a universe of thousands of stocks. It made him burrow into libraries and basements for records nobody else troubled to get. He sat up nights studying hundreds of thousands of numbers that would glaze anyone else’s eyes. He read every word of several newspapers each morning and sucked down the Wall Street Journal like his morning Pepsi, then Coke. He dropped in on companies, spending hours talking about barrels with the woman who ran an outpost of Greif Bros. Cooperage or auto insurance with Lorimer Davidson. He read magazines like the “Progressive Grocer” to learn how to stock a meat department. He stuffed the backseat of his car with Moody’s Manual and ledgers on his honeymoon. He spent months reading old newspaper dating back a century to learn the cycles of business, the history of Wall Street, the history of capitalism, the history of the modern corporation. He followed the world of politics intensely and recognized how it affected business. He analyzed economic statistics until he had a deep understanding of what they signified. Since childhood, he had read every biography he could find of people he admired, looking for the lessons he could learn from their lives. He attached himself to everyone who could help him and coattailed anyone he could find who was smart. He ruled out paying attention to almost anything but business- art, literature, science, travel, architecture – so that he could focus on his passion. He defined a circle of competence to avoid making mistakes. To limit risk he never used any significant amount of debt. He never stopped thinking about business: what made a good business, what made a bad business, how they competed, what made customers loyal to one versus another. He had an unusual way of turning problems around in his head, which gave him insights nobody else had.

Japan: The last 20 years

What is the first thing that comes to your mind when you hear “JAPAN”? Maybe you’re a gamer and you thought about Sony’s play station or is it you’re hungry and thought about sushi or did you think about a Samurai or a weird Japanese TV show?
I can tell you, economists think about deflation. And there is a good reason for that!

Japan has been in deflation for the past 20 years!

Reasons:

- Inefficient monetary policy
– Financial shocks from Asian crisis in the 1990s, tech bubble of 2000 and 2008 financial crisis
– Decrease in prices after the Japanese real estate bubble burst at the end of the 80’s
– Inflow of inexpensive goods from other Asian countries. To stay competitive Japanese businesses had to decrease their prices.

In a deflationary society, individual businesses cannot raise their prices. If they did their sales would suffer, as they wouldn’t be competitive anymore. Not being able to raise prices means profits will stall. And thus forecasting limited long-term profits, businesses will decrease their investments and keep hiring at a minimum.

In the same manner, households expecting no increase in wages and decreasing prices in the future, will decrease their consumption until prices are lower and lower. Thus limiting growth.

And that is what happened in Japan. Instead of investing, Japanese households and businesses saved their savings for future consumption. Furthermore, it is important to remember that household savings are banks’ liabilities. So banks not being able to lend and increase their assets, started buying safe Japanese government bonds. Meanwhile, a decrease in tax revenues and a growing spending that is needed to support an aging population, increased government debt substantially. In 2013, Japan government debt was 10 Trillion Yen with a GDP of 6 Trillion.

The whole economy was in a vicious cycle. Prices did not increase, sales and profits declined, wages stalled, consumers stopped spending, and prices continued to decrease.

This long-term deflationary trend had a psychological impact on the Japanese society. They got used to saving and investing in safe assets only. However for the country to get out of this deflationary spiral, Japanese people will need to spend and invest in riskier assets.

And that is why the Japanese central bank initiated a QE programs. By buying JGB, the government puts pressure on long-term nominal interest rates.
The goal is to keep interest rates low to stimulate spending. Which should increase inflation. But remember, it needs to be slow and stable inflation otherwise it would be devastating for the country.

If all goes according to plan everyone can live happily ever after. If not, inflation will eat savings, devalue the currency and send the stock and bond markets to perdition.

Georges Boustany

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