Remember John Paulson? The hedge fund manager made famous by his US$15bn in gains made shorting US mortgage bonds? Guru, right?
Here are Paulson’s Advantage Fund’s returns over the past five years:
So far in 2016 his fund is down a further 18.5%. $100,000 invested with Paulson at the start of 2011 is worth $26,500 today. Turns out the guru is not such a guru.
The evidence looks compelling that he got lucky, once, and has made himself a billionaire out of it.
What’s that got to do with us?
I see guru adulation from the media all the time, and it’s dangerous. Someone gets one call right, and suddenly they become an expert on every single topic the media wants a comment on.
Yes, we wrote some things about Dick Smith that looked prescient with the benefit hindsight. Yes, Ingham’s is another private equity float where the sellers have made a fortune in a very short period of time. No, we won’t be buying the shares.
If I had to bet, I would bet that it disappoints. But the whole point is that we don’t have to bet at all.
Most of the 2,000 or so ASX-listed stocks don’t look to have enough margin of safety to justify us doing weeks of work. Our strategy is to be patient, selective and to wait for opportunities to come along that seem clearly and obviously cheap. Even then we manage to get plenty wrong.
Ingham’s is just another to add to the long list of stocks where we don’t have an edge.
14 thoughts on “One Right Call Doesn’t Make You More Likely to be Right”
I think it very telling that Warren Buffett is currently sitting on close to $US85 billion ($AUS110million) cash.
It suggests to me that we are in for a rough ride soon, perhaps with the catalyst being the Federal Reserve and other central banks start to raise the interest rate? perhaps a hard Brexit?, perhaps a bit of trouble with two of the large European banks (hint hint in Germany and Italy)? perhaps Russia poking its nose into things around the world a bit more aggressively.
Who knows, but it seems its a good time to be sitting and waiting patiently as you have pretty much stated you are doing Steve at Forager.
I think that this says as much about popular media as it does about John Paulson. Usually, the “experts” you see touted on the media are actually the people who were willing to drop everything to do an interview (i.e., media-friendliness is a better predictor of who will become a designated ‘expert’ than expertise).
There are two types of money manager in the world: the promotional type and the performance type, and when it comes to attracting FUM, the former utterly dominates the latter.
IMO, anyone who is gullible enough to fail to see charlatanism on parade is doing the right thing when he/she transfers wealth to the counterparties of his/her representative charlatan.
PS. At least Paulson got one call right. Alan Greenspan got nothing right in a far more important role, yet the media still seems to think that the sun shines out of his tail.
Has anyone noticed the pressure that has been piled on Platinum Asset Management lately, for not focusing more on marketing and distribution. According to the pundits, lack of marketing & distribution is Platinum’s Achilles heal.
Well I’m willing to bet that if Platinum’s focus hadn’t been where it is, from day one, it wouldn’t be the behemoth that it is today.
The tide will turn.
I think a key lesson is that whilst “results” matter, they only matter if they seem to be backed up by process, and dare I say, character and culture. Good results, like half truths, can be more misleading than outright lies.
The Inghams IPO looks worse the deeper you dig. Coincidence they kept historical’s limited to FY14?……
Well this is a pretty lazy blog post…
If you agree with your premise that one right year doesn’t make you more likely to be right then logically 4 out of five down years doesn’t necessarily mean your wrong.
WIthout even a cursory look at how those returns have been made up over those years for all you know a cheap position is now just significantly cheaper.
Most value investors bleat on about dont judge me over 5 years give me 10 at least or a “long term” horizon so therefor if you hold him to the same standards as you demand for yourself this article stinks of hypocrisy
Volatility is not risk unless you are forced to liquidate positions
If I am down 75% over five years, feel free to fire me.
Funnily enough, whenever someone asks me to invest money for them, I tell them that they should be cognisant of the realistic possibility that I might lose around three quarters of it.
My reasoning is that very severe market dislocations like the 1929-32 crash do happen, albeit rarely. Using the ’29-’32 crash as a template, the market effectively halved three times over the course of three years. Even if I continued my c.15%p.a. long term outperformance (itself a big assumption – god knows how much of that is luck), then that would equate to a loss of about 73% over three years in a ’29-’32 crash scenario.
The reason I believe Paulson is incompetent has as much to do with the things he has said and done, as it does his awful record.
The real brains behind Paulson’s famous trade was actually an employee of Paulson’s named Paolo Pellegrini. Paulson, the marketer, simply hogged all the kudos when everything went right.
I think that if Pellegrini had been in charge, the Advantage fund’s results would have been markedly different to date.
When the fund managers are judged on quarterly performance, it’s fair to ask for a couple of years, or so.
When the WHOLE market is down, it’s a standout who is up.
When the WHOLE market is up, or generally up, especially over the last 5 years, it takes a certain skill to be down year after year after year.
Crikey I’m a know-nuffink in the US stock market but my US holdings, purchased based on only a little research, are well up over a similar timeframe. My performance: 1 year, 5.7%, 3 years: 23%, 5 years: 58%. And I’m not a professional, thats a basket of 8 stocks where the performance of a one has been terrible, one other has been mediocre, and the others have done quite well.
So I think your comment here is a bit rich.
Jimmy: “If you agree with your premise that one right year doesn’t make you more likely to be right then logically 4 out of five down years doesn’t necessarily mean your wrong.”. So Paulson’s fund is down nearly 75%. How far down does he have to go before you decide that he’s wrong? When he hits zero?
Paulson’s fund is down nearly 75%. Think about what he needs to from that position just to break even. That’s before you consider the cost of time.
I think one of the broad afflictions in the post GFC era has been the false belief that crises happen more often than they really do, and that crises are more inevitable after a build up in imbalances than they really are. Jesse Colombo is a classic case of this – someone still quite young and inexperienced who sees bubbles everywhere that will inevitably burst.
The acclaim pundits that predicted the GFC has garnered has spawned a cottage industry of investors making bold predictions and big bets on the next crisis. Everyone sees inevitable crisis everywhere. Paulsen has likely bet big on gold and shorted bonds; probably bet on a euro breakup and shorted periphial bonds heavily, etc.
The real truth is that while crises do occasionally happen, they dont happen that often, because you need more than merely the presence of imbalances to trigger them. There are always imbalances. Imbalances are like a powder keg, but you need a unique set of path dependent circumstances to occur for a spark to develop that ignites them. For the GFC, it was a unique combination of a large amount of derivatvie sidebets that multiples subprime loan losses by many times, coupled with the Feds decision to allow Lehman to go under. Absent these facts, we would not have had a global financial crisis. Just a contained subprime write off cycle.
As is often the case in markets, people swing from one extreme to the next. Pre GFC, no one thought a crisis possible in the wake of the so-called great moderation, including the federal reserve. Now everyone believes crises are inevitable everywhere all the time. We swung from one extreme to the next.
The propensity to overestimate the inevitability of imbalances leading to crisis has resulted in too many investors placing large macro bets and ignoring bottom up stock fundamentals. While the Paulsens of this world have kept betting of disaster, good companies have kept on growing and lots of money has been made by grass roots stock pickers – like forager – buying good companies at cheap prices.
We need to be mindful of big picture risks of course. I wont own Ausy banks for instance, because i see too much tail risk associated with their exposure to the frothy property markets. However, the risk of a property crash and banking crisis in Australia is only a possibility, not an inevitability, and recognition of this risk does not stop me buying good quality, strongly financed companies at low valuations.
The key in the markets is to avoid taking extreme, simplistic views, and have a more nuanced, balanced view. Paulson’s success probably went to his head and he has been overconfident and too extreme in his views and positioning.
Certainly ‘a crisis’ is not the result of an independent uniformly distributed random event.
The difficulty seems to be how what imbalances how large,and how many are necessary, and then what additional ‘trigger’ is needed.
To my knowledge certainly we don’t know enough. In mathematical terms the imbalances we have identified are not ‘sufficient ‘
Of course its a bit rich because in all likely hood Paulson has made some horrible decisions trying to replicate his massive out performance.
You just cant know that looking only at performance numbers because you don’t know the positions he has taken and their risks vs payoffs