Sunday Morning Coffee

The Barron’s interview this week was with Marty Whitman who is probably most known as the manager of the Third Avenue Value Fund (TAVFX). The fund is 20 years old and since inception it has absolutely clocked the broad market. According to Morningstar $10,000 at inception would have grown to $112,949 versus $43,800 for “World Stock” and $30,772 for “MSCI EAFE NR USD.” When the market dropped 44% ten years ago TAVFX only went down 17% (per Google may not include dividends). However at the March 2009 low when SPX was down 55% TAVFX was down 62% as he got caught in a lot of the “wrong” stocks during the meltdown. There are several quotes from the interview that I think are very instructive. As I cast a critical eye here I would note that no single method of portfolio construction and cycle navigation can be the best for all times. Whitman is a hardcore value investor. In the interview he says that things like MPT and diversification are “absolute garbage.” Diversification to protect against the downside is “worse than useless.” When asked how he protects against risk (the better word would have been volatility) with a concentrated portfolio he said that “we get protection by being price-conscious and by being extremely knowledgeable about our holdings. And diversification is a surrogate—and a damn poor surrogate—for knowledge, elements of control [of a company] and price-consciousness. If you are really a value investor and do deep research, how many investments can you be involved in at the same time?” Given the financials he held onto and how the fund performed in...

Sunday Morning Coffee

The Barron’s interview this week was with Marty Whitman who is probably most known as the manager of the Third Avenue Value Fund (TAVFX). The fund is 20 years old and since inception it has absolutely clocked the broad market. According to Morningstar $10,000 at inception would have grown to $112,949 versus $43,800 for “World Stock” and $30,772 for “MSCI EAFE NR USD.” When the market dropped 44% ten years ago TAVFX only went down 17% (per Google may not include dividends). However at the March 2009 low when SPX was down 55% TAVFX was down 62% as he got caught in a lot of the “wrong” stocks during the meltdown. There are several quotes from the interview that I think are very instructive. As I cast a critical eye here I would note that no single method of portfolio construction and cycle navigation can be the best for all times. Whitman is a hardcore value investor. In the interview he says that things like MPT and diversification are “absolute garbage.” Diversification to protect against the downside is “worse than useless.” When asked how he protects against risk (the better word would have been volatility) with a concentrated portfolio he said that “we get protection by being price-conscious and by being extremely knowledgeable about our holdings. And diversification is a surrogate—and a damn poor surrogate—for knowledge, elements of control [of a company] and price-consciousness. If you are really a value investor and do deep research, how many investments can you be involved in at the same time?” Given the financials he held onto and how the fund performed in...

The Big Picture for the Week of October 31, 2010

Morningstar posted a short interview with Jack Bogle that is worth discussing (hat tip to ETF Trends for posting this). Most noteworthy are Bogle’s comments about why he is not a big believer in foreign investing. The general tone of this post will be to disagree with Bogle’s comments but I would make a couple of points before I do. As I have said many times here, despite Bogle’s belief that no one can predict the what the market will do he is actually pretty good at recognizing market extremes. Not something he does often of course but he has been correct at several important points in the past. Given who he is it is not too shocking to me that he would have some ability to assess the big picture for equities. To this most recent interview. Bogle believes that foreign markets will perform about the same as the US market over the next ten years. He notes risks associated with foreign markets include “unforeseen risks, currency risks, sovereign risks and more that could equalize the markets.” Because of this equal performance he sees coming he would not allocate more than 20% to foreign. Based on what I know of Bogle I doubt this is a new conclusion he has drawn. I cannot recall him saying 20% foreign before but assuming this is not new from him then it turned out to be very wrong, as in not enough, during the last decade. I’ve made a point of referencing the data from Bespoke Investment Group that shows the S&P 500 going down in the last decade by 24%...

The Big Picture for the Week of October 31, 2010

Morningstar posted a short interview with Jack Bogle that is worth discussing (hat tip to ETF Trends for posting this). Most noteworthy are Bogle’s comments about why he is not a big believer in foreign investing. The general tone of this post will be to disagree with Bogle’s comments but I would make a couple of points before I do. As I have said many times here, despite Bogle’s belief that no one can predict the what the market will do he is actually pretty good at recognizing market extremes. Not something he does often of course but he has been correct at several important points in the past. Given who he is it is not too shocking to me that he would have some ability to assess the big picture for equities. To this most recent interview. Bogle believes that foreign markets will perform about the same as the US market over the next ten years. He notes risks associated with foreign markets include “unforeseen risks, currency risks, sovereign risks and more that could equalize the markets.” Because of this equal performance he sees coming he would not allocate more than 20% to foreign. Based on what I know of Bogle I doubt this is a new conclusion he has drawn. I cannot recall him saying 20% foreign before but assuming this is not new from him then it turned out to be very wrong, as in not enough, during the last decade. I’ve made a point of referencing the data from Bespoke Investment Group that shows the S&P 500 going down in the last decade by 24%...

Fad, Mania or Bubble?

A very short post as we are taking the overnight flight back to Phoenix from Kauai. A reader asked for my take on a new Rare Earths ETF that is supposed to start trading today with ticker REMX. I have not looked at this at all so for now I can only talk from a big picture viewpoint. There are quite a few stocks in the space but most of them seem to be foreign stocks with five letter ticker symbols. The name that gets the most attention is NYSE traded Molycorp (MCP) which operates the Mountain Pass site in California which was shut down a while back due to being uneconomical but is apparently going to reopen soon. There are other pockets of rare earths here and there that will come on line and probably make a dent in China’s strangle hold. You probably know that despite the moniker the minerals in question are not that rare. There are 17 of them and apparently where there is one there is all 17 (I know this from my reading not from firsthand knowledge. MCP’s stock has gone berserk, upward, since it listed a few months ago and was up a bunch on Thursday, maybe because of the fund, but either way it looks to me like the stock has caught a pretty substantial tailwind as it is the only easily traded (meaning non pinksheet listed) rare earth stock—or at least that is the perception. So we have a great story and not much supply so the one popular name is up a ton. The behavior has of course happened...