By Kevin Muir
I sure hope Julian Robertson is a Ryan Reynolds fan. And although I doubt the MacroTourist Letter is on the legendary hedge fund manager’s daily reading list, if he happens across this post, Julian (and the rest of you on the board) – know it was all done with tongue firmly in cheek (kind of).
Ryan’s movie DeadPool is by far and away, the best Marvel movie ever made. I guess you can disagree with that statement – that’s what makes a market, but you would still be wrong.
For those who haven’t seen the movie, Ryan Reynold’s character frequents a bar that has a DeadPool. There, listed for everyone to see, are the bets on who will die first. Whoever “owns” the first person to die, wins the pool.
Today’s market is in desperate need of a “Value Investor’s DeadPool.” With the constant fleeing of capital from active management into passive (most of which can certainly not be described as moving into “value”), the pain for those investors still believing that buying cheap companies has merit is intense.
And as I watch this passive investing renaissance unfold, all I can think about is the last time value was so scorned. It was the year 2000, and the DotCom bubble was in full force.
The S&P value versus growth index ratio had been plummeting for four years, and investors were openly mocking those who didn’t “get it” and embrace the new technology era. Into this mania, one of the greatest value investors of all time, Julian Robertson decided enough was enough, and he closed his Tiger Hedge Fund awfully close to the bottom.
For kicks, I dug up his final letter to investors. The funny part? It seems just as applicable today as 17-years ago.
Tiger Management released the following letter on March 30, 2000 to its limited partners, announcing the closure of its funds.
In May of 1980, Thorpe McKenzie and I started the Tiger funds with total capital of $8.8 million. Eighteen years later, the $8.8 million had grown to $21 billion, an increase of over 259,000 percent . Our compound rate of return to partners during this period after all fees was 31.7 percent . No one had a better record.
Since August of 1998, the Tiger funds have stumbled badly and Tiger investors have voted strongly with their pocketbooks, understandably so. During that period, Tiger investors withdrew some $7.7 billion of funds. The result of the demise of value investing and investor withdrawals has been financial erosion, stressful to us all. And there is no real indication that a quick end is in sight.
And what do I mean by, “there is no quick end in sight?” What is “end” the end of? “End” is the end of the bear market in value stocks. It is the recognition that equities with cash-on-cash returns of 15 to 25 percent , regardless of their short-term market performance, are great investments. “End” in this case means a beginning by investors overall to put aside momentum and potential short-term gain in highly speculative stocks to take the more assured, yet still historically high returns available in out-of-favor equities.
There is a lot of talk now about the New Economy (meaning Internet, technology and telecom). Certainly the Internet is changing the world and the advances from biotechnology will be equally amazing. Technology and telecommunications bring us opportunities none of us have dreamed of.
“Avoid the Old Economy and invest in the New and forget about price,” proclaim the pundits. And in truth, that has been the way to invest over the last eighteen months.
As you have heard me say on many occasions, the key to Tiger’s success over the years has been a steady commitment to buying the best stocks and shorting the worst. In a rational environment, this strategy functions well. But in an irrational market, where earnings and price considerations take a back seat to mouse clicks and momentum, such logic, as we have learned, does not count for much.
The current technology, Internet and telecom craze, fueled by the performance desires of investors, money managers and even financial buyers, is unwittingly creating a Ponzi pyramid destined for collapse. The tragedy is, however, that the only way to generate short-term performance in the current environment is to buy these stocks. That makes the process self-perpetuating until the pyramid eventually collapses under its own excess.
I have great faith though that, “this, too, will pass.” We have seen manic periods like this before and I remain confident that despite the current disfavor in which it is held, value investing remains the best course. There is just too much reward in certain mundane, Old Economy stocks to ignore. This is not the first time that value stocks have taken a licking. Many of the great value investors produced terrible returns from 1970 to 1975 and from 1980 to 1981 but then they came back in spades.
The difficulty is predicting when this change will occur and in this regard I have no advantage. What I do know is that there is no point in subjecting our investors to risk in a market which I frankly do not understand. Consequently, after thorough consideration, I have decided to return all capital to our investors, effectively bringing down the curtain on the Tiger funds. We have already largely liquefied the portfolio and plan to return assets as outlined in the attached plan.
No one wishes more than I that I had taken this course earlier. Regardless, it has been an enjoyable and rewarding 20 years. The triumphs have by no means been totally diminished by the recent setbacks. Since inception, an investment in Tiger has grown 85-fold net of fees; more than three time the average of the S&P 500 and five-and-a-half times that of the Morgan Stanley Capital International World Index. The best part by far has been the opportunity to work closely with a unique cadre of co-workers and investors.
For every minute of it, the good times and the bad, the victories and the defeats, I speak for myself and a multitude of Tiger’s past and present who thank you from the bottom of our hearts.
Although this cycle’s decline in value stocks relative to growth stocks has not been as steep as the DotCom bubble, the last ten years has been every bit as painful for the Julian-Roberston-disciples who practice the ancient witchcraft of value investing.
And when I saw one of my favourite investors write a letter to his clients about this very subject, I couldn’t help but draw parallels to the 2000 Tiger closing.
David Einhorn’s Greenlight Capital monthly piece has the same tone as Roberston’s 2000 letter:
I don’t have much to add. As Roberston and Einhorn both say – it will end when it ends (I am paraphrasing).
I am not sure who will be the big name that taps out at the bottom. Probably someone who has made enough money that he/she doesn’t need to bother with this Central Bank fueled madness.
But for long-term investors, think about doing a little style switch down here. You don’t need to fight the market and get short (like your idiot author), but there is nothing wrong with switching some of your higher octane growth names for cheaper value plays. Maybe even give Einhorn a little money – after all, I don’t have Greenlight in the DeadPool. I need him to stick around.
Thanks for reading,