Here’s a contest for you — since y’all did so badly on the last one — can anybody find me a value investor who isn’t saying that there’s loads of cheap stocks out there and that they’re pretty bullish over a medium- to long-term time horizon? Buffett, Grantham, and other devotees of Ben Graham all seem to be singing from the same songbook. And when there’s so much unanimity, I start getting worried. So, a few questions for value investors:
- How do you intend to make money, exactly? Step one is easy: buy cheap stocks. And step three we all know: profit! But what’s step two, in the middle? Is it something to do with the efficient market hypothesis?
To put it another way: what makes you think that cheap stocks are more likely to go up, over the medium term, than they are to go down?
- How sure are you that stocks are cheap? Let’s all agree that stocks have been expensive for a long time. Is there a danger you’ll start acting like the poker player who’s been dealt utter crap for so long that he gets far too aggressive when he finally looks down to see some OK cards?
- It’s almost impossible to find a stock which hasn’t fallen a long way over the past year. And the last words of anybody running other people’s money are always something along the lines of "but now’s a better time to invest than ever". So even assuming that the cheap stocks you’ve identified do go up, what reason do we have to believe that they will outperform the market as a whole?
One question in the back of my mind during this crisis has been how Paul Singer, of Elliott Associates, has been doing. I wrote a pretty long profile of him, back in the day, and the one thing he was more adamant about than anything else was that his first job was to see round corners, to worry about tail risk, and to make sure that he was protecting his investors’ money. Then he would see about returns.
Well, lo and behold, Singer’s strategy seems to have worked: Matthew Mosk reports today that Elliott is up 6% for the year. And Singer is no one’s idea of a value investor. In fact, he made his fortune in what was possibly the single most toxic strategy of 2008, convertible arbitrage.
Now I have no idea how Elliott’s been making money this year. But over the first year of this bear market, a strategy of avoiding risks would seem to have been a very good idea. And jumping in and buying stocks at these levels is most emphatically not a strategy of avoiding risks.
If I had to sum it all up in one big question, it would be this: "What exactly are you saying beyond calling a bottom?". I might have some faith in the ability of value investors to find cheap stocks, but I have no faith at all in the ability of value investors to time the market. And a lot of what these investors are saying seems, at its core, to apply to the market generally more than it does to value stocks in particular.