Robert Vinall’s 10-year anniversary letter is a fantastic read

Evolution:
Deep value
To great businesses
To great managers

“the surprises with managers I trust are generally positive, whereas those with managers I do not are nearly always negative.”

bit.ly/2y01IcD “Tech” paradigm shift

“the single most difficult transition I made as an investor over the last ten years.”

Value investor’s circle of competence vs.
“the growing evidence that companies on the receiving end of the disruptive forces ..were increasingly looking like roadkill.”

Richard Jenrette in 1966
When performance measurement became a thing

Clients: you can’t benchmark against S&P 500 because “you can’t invest in the averages”
(you couldn’t until the early 1970’s)

“for a large institution… equalling the market is a very good performance” Higher relative earnings growth
At reasonable price
Consider current valuation relative to market vs. historical relationship

1960’s: calculate this on a quarterly basis

“The chief advantage of relatively growing earnings at a reasonable relative multiple is its adaptability”

Bill Miller during the dot-com years

1997: looking past traditional value
"retains a scholarly bent"
complex adaptive systems
"changes are context-dependent"

Forward-looking, focus on free cash flow

Low turnover, "positively glacial" 1998: outperformed for 7 years
Concentrated portfolio
Financials & tech stocks
Out of favor stocks, Brady bonds

"central tendency valuation"

Extensive overview of academic research on market efficiency, behavioral effects, valuation

"economics of alpha extraction, the costs and incentives of informational arbitrage as a sustainable business proposition"

h/t @mjmauboussin

pdfs.semanticscholar.org/435a/8ad41300e… "prices do not adjust to fundamental value instantly by fiat"
"continuous flow of information and rumors disguised as information"

"because information is costly, prices cannot perfectly reflect the information which is available"

from one of my favorites, the Money Game

"This is a book about image and reality and identity and anxiety and money. If that doesn't scare you off, nothing will" "we are taught that money is A Very Serious Business

Keynes
"the game of professional investment is intolerably boring to anyone who is entirely exempt from the gambling instinct"

"Does that sound like Owning a Share of American Industry? No, but it sounds like the stock market

Everyone hits a rough patch now and then

Druckenmiller on the cover of Institutional Investor in early 1998 with a deflated balloon: "Quantum limp"

A defiant Soros:
"we are not ready for extinction yet"

drive.google.com/open?id=1Tgk9z… 1996: first annual loss since 1981
"an ongoing misanalysis of Japan"

Risk management & opportunity cost
"hurt us by lowering risk where we should have had it,
and by never letting the fund be aggressive in those areas where I had a view"

Been thinking about drawdowns and how they affect people

Bob Wilson's Resorts International short is a good example

Wilson at the time had $40m of equity, $200m of exposure. Resorts was a $3.5m short

(sources: Killing the Market, Money Masters, WSJ, Wapo) "considered himself a moneymaking machine" compounded at 35% 1965-1977

Now needed "time out for repairs" - a 6 month round-the-world trip

Negative on the economy but thought the market wouldn't do much
"this is a very stagnant time"

Didn't hide his Resorts short

Richard Heuer’s Psychology of Intelligence Analysis
H/T @MoatsLikeKodak who reminded me of this gem

“to illuminate the role of the observer in determining what is observed and how it is interpreted”

cia.gov/library/center… Three fundamental points:
“Mind is poorly wired to deal effectively with inherent and induced uncertainty”
“Increased awareness of biases does little by itself”
“analysis of complex issues can be substantially improved”

Bernard Baruch, My Own Story

"my years in Wall Street became one long course of education in human nature"

"nearly always the problem was .. how to disentangle facts of a situation from the elements of human psychology" "if there was any 'key' to this process of growing up, it lay in the systematic efforts I made to subject myself to critical self-appraisal"

From Mauboussin's Expectations Investing:

John Burr Williams: The Theory of Investment Value, 1938

Williams makes the case for using the present value of future dividends

"the critical value above which one cannot go in buying or holding without added risk" Defines an investor as a long-term holder for dividends
Speculator as the holder interested in resale price

"usual buyer is a hybrid, partly investor and speculator"

Here's to the crazy ones, the misfits, the rebels..
Ed Thorp in 1974

"the market is far more interesting than other forms of gambling"
but still a form of gambling :)

PDF
drive.google.com/open?id=1SjEAm… Convertible arbitrage
Thorp: "if you hedge properly, you can win on nine out of 10 trades
I call it getting rich slow"

"the only better fund was one of those crazy ones invested in only gold stocks"

"the more we can run the money by remote control the better"

This week's article on Einhorn was a good reminder that famous money managers are just people

Personal problems, burnout/motivation, ego/hubris, organizational/business issues - these things matter

Even Soros went through a transformational crisis, back in 1981 from Slater's book:
"like mushrooms, fortunes seem to grow best in the dark"

In June of 1981, Soros appeared on the cover of the Institutional Investor

1981 turned out to be his worst year: down 22.9%, and AUM cut in half

Buffett: calm, "praises by name, criticizes by category"

Also Buffett: gets agitated when talking about iconic 60's manager Jerry Tsai

Kept an "old Moody's showing the holdings" (more than half of which imploded)

"this guy was supposed to be an analyst!" Tsai was an iconic "performance" (momentum) managers of the 60's

"a shrewd and decisive picker of stocks," he asked Fidelity's Johnson for his own fund
"Go ahead. Here's your rope." (hang yourself with it)

(from The Go-Go Years by Brooks)

In 1987 Fortune profiled short sellers that had performed surprisingly well during the bull market

Companies won’t talk to you: “It’s as if you were calling up the CEO to ask if someone in his family has AIDS” Jim Chanos

“stupendously leveraged, no operating earnings, and a stock price dependent on asset values that were not sustainable”

Also: basketball with the boys every day?

Summer of 1987
Paul Tudor Jones is the “Trader with a Hot Hand” Hot streaks

Early 1988

A 34-year-old Stanley Druckenmiller has weathered the '87 crash and turned bearish on the economy

He is running running $3.2 billion across five different funds Bearish view expressed: low net exposure (but not net short), arguably low gross exposure, some long bonds

Lagging vs. leading indicators (that said, no recession until 1990..)

You call this a bond bear? Let's take a look at a real bond bear

The 1994 "Bond Massacre" Clinton: Why are bonds selling off?
Rubin: It's complicated..

Steinhardt: "I just remember losing money and staying up nights and being unable to sell anything at market"

Lampert in the 1990s. Simpler times It's the 80's and arbitrage is where it's at

When it was just George, Jim, and $20 million AUM
"The Outsiders" in 1975
"if you copy everybody else on Wall Street, you're doomed to do poorly"
"professional money managers are like generals who are always fighting the last war" Soros' Theory of Reflexivity when it was still called "self-reinforcing moves"

Graham Doddsville Winter 2018
Cooperman bashing Ackman ($ADT)
Sequoia on $GOOG, $CACC
Vulcan Value on $ORCL
Oasis on activism in Japan/China
Pitches: Staples 2025 bond, $FLT, $FDC

www8.gsb.columbia.edu/valueinvesting… Cooperman: don't talk about your shorts (we'll let the last sentence slide)