Letters to Our Clients
Boeing, From Purchase to Sale: A Value Investor’s Exercise of Patience, Discipline and Risk Reduction
From the time I was a little tyke, I knew the benefits of having cash available to make a purchase. With it I could easily buy something under very favorable terms when others were in desperate need of that cash. Maybe that drive to make a purchase at a bargain price is in my DNA, or it might just be from following my Mom around to all the yard sales in town, watching as she bargained to save a nickel. So it should be no surprise that when I discovered the value approach to investing it felt right in every way. Buying a small ownership in a business, via the public securities market, at a price that was less than the value I could reasonably place on the entire business just made sense to me.
In a conversation with the master jazz musician and Pulitzer Prize-winning composer Wynton Marsalis, he told me, “You need to have some restrictions in jazz. Anyone can improvise with no restrictions, but that’s not jazz. Jazz always has some restrictions. Otherwise it might sound like noise.” The ability to improvise, he said, comes from fundamental knowledge, and this knowledge “limits the choices you can make and will make. Knowledge is always important where there’s a choice.” - The Art of Choosing, Sheena Iyengar
In one of our meetings, Justin asked a question of me. He said, “Why is it that the only investment managers telling people to be careful are old timers like you? Jeremy Grantham of GMO, whose seven year forecast is negative in all asset classes other than emerging markets. Howard Marks, whose most recent memo “There They Go Again…Again” strongly suggests people be cautious in their investing today. John Hussman, who has been screaming at the top of his lungs about the “overvalued, overbought, overbullish” markets. Seth Klarman who, at least from what we hear, is sending money back to his investors due to an absence of good opportunities. And finally Warren Buffett, the most recognized value manager in the world, whose Berkshire Hathaway is holding billions, not because he wants to sit on the cash, but because like Klarman, he is struggling to find options available at a reasonable price to purchase.
Most of us believe that experience in an occupation, measured by time spent on the job, leads to higher productivity for the employer and greater income for the employee. I agree that this belief holds true for most occupations. However, I disagree when it comes to the business of providing investment advice. In this business, the best experience is gained when an advisor’s own wealth is at risk, and his or her decisions are measured by personal dollars gained or lost. While it’s always good to be right about your investments and make money, the most valuable knowledge is gained through the experience of being wrong.
“When the facts change, I change my mind. What do you do madam?”
- Winston Churchill, John Maynard Keynes, Paul Samuelson?
The CFA Institute’s second quarter 2017 Financial Analysts Journal included a research article penned by Martijn Cremers, professor of finance at the University of Notre Dame, entitled “Active Share and the Three Pillars of Active Management: Skill, Conviction, and Opportunity.”
We are currently struggling with portfolio construction due to historically high stock prices and interest rates that provide little reward, and I thought it would be beneficial to share with you Cremers’ understanding of what it takes to be a successful money manager:
One of the greatest strengths of American capitalism is how it addresses the problems faced by its citizens. The greater the problem, and the more lives impacted by the problem, the more entrepreneurs, academics and government officials there are seeking solutions. As it is, government tends to attack problems with laws and regulations that they hope will then steer profit seeking entrepreneurs to find a solution benefiting all of society. In the world of investment management, these profit seeking entrepreneurs rely heavily on the work of academic researchers to isolate a process that can then be manufactured into a product and monetized.
Kendall J. Anderson, CFA