Monthly Archives: August 2012

Pretty Lies

In a survey of literate financial industry professional I can more or less guarantee that the voting for McMurtry”s Lonesome Dove versus McCarthy’s Blood Meridian would fall along growth versus value ideological lines. Written in the same year, both are very, very good books, arguably the seminal achievements by each author. Only one will be read until the lights go out for good on humankind.

McMurtry’s book is a pretty lie, post-modern in the sense that its subject matter is the myth of the West rather than the history itself. The truth and accuracy, and there are considerable amounts, are woven into the myth.

Blood Meridian, on the other hand, is a poetic horror. It is devoid of heroes, building a story outwards from historical accounts of genocide. For the cynical, value-oriented reader, it also feels true.

McCarthy detractors will happily trot out numerous excerpts where his writing is almost comically overwrought. This doesn’t change my view. It is analogous to pointing out basketball games where Kobe Bryant or Larry Bird took too many shots – it doesn’t deny their greatness, just highlights its borders. In any event we’re not really here to discuss literature.

The question of the day as it applies to finance is: Is it worthwhile to know the truth?

I suspect that the eminent Steve Randy Waldman would argue that in aggregate, the benefits of investment truth are overrated. In his Why is finance so complex?, which is among my top five blog posts ever written in any field, he argues persuasively that one of the central economically-constructive tasks of the financial industry is to hide risk. Otherwise, fewer people would invest, and the entire economy would be poorer.

This notion would horrify the conventional Blood Meridian-loving value investor. What is net asset value, after all but the accounting TRUTH. What could possibly matter more?

Strict value investors almost always exist outside of the daily operations of finance. They don’t buy new issues and they don’t take pitch meetings. They are not susceptible to the “its a great story” growth stock pitches from the trade desk, so they don’t get many calls. The contact between value managers and investment banks usually takes the form of the manager asking complicated accounting questions of the analyst. As clients, since they don’t trade a lot, they are often considered more of a pain in the ass than they’re worth

They also miss out on all the fun. With rare exceptions in the severely distressed category of cigar-butt investors (Michael Price being one) there are no 10-baggers and no Laird Hamilton big wave “riding the winners” surfing episodes.

Longevity and consistency are the most obvious benefits of conservative value investing. Value funds will lose client assets during big rallies but rarely blow up. Even moderately talented value managers rarely go out of business.

But its a weird, anti-social type of victory. You are never in with the In-Crowd, not in THE GAME, with all of its incumbent go-go, chest-thumping, hand tailored suit, Master of the Universe mythology.

So who wins in this search for the truth? Is it enough to note that Lonesome Dove has outsold Blood Meridian by at least 400%?

Alligator Inc.: The S&P 500 as Swamp

Humor me for a minute and imagine the Everglades is an asset market and every living species of thing in it is an investable stock. The bugs will be our microcaps. They are easily killed so we’ll need a batch of those. If they aren’t all eaten or stepped on, some of them might live to lay eggs and we’ll have a 12,000 bagger in the portfolio.

The birds, and I had trouble with this, will be our counter-cyclical health care stocks. The birds have problems of their own, but living in the trees (Treasuries) they are less suceptible to changes in economic conditions for the ground dwellers. As long as there’s some kind of food available when they swoop down, its all good.

No one’s interested in putting money in birds or bugs, though. They want Alligator Inc. –  - the biggest, baddest, perfectly- honed-by-evolution killing machines. Every investment firm has to have an alligator analyst, and every morning one of them’s on SwampBox talking up the benefits of being unassailable at top of the food chain.

Until some mouthbreather gets bored with the Burmese Python he kept in his basement to impress his friends and lets it loose.

Burmese Pythons grow to 20 feet long and kill alligators. The guy on SwampBox isn’t worried, though. The growing python population is a blow, but alligators have proven in the past what badasses they are and it wont be a huge deal.

Hedge funds quickly get long snakes, short rodents. When the Pythons aren’t strangling alligators they’re eating rodents and the little bastards are disappearing at a rapid pace.

The retail investor will, of course,  be late on all of this. Their brokers will have stuffed them full of rat new issues after the environmental legislation went through.  The rodent analysts never show up at the office and write reports because the big checks for rodent IPOs are a thing of the past.

The pythons are eating everything that used to eat bugs, so bug investors are outperforming. Bug-eating birds are getting fat, too. Maseratis all-around for bankers in the bird and bug sectors.

No one really knows what to do with Alligator Inc., which still dominates the index. Pictures like THIS make shareholders nervous, but the expert on teevee says everything’s good, although he admits to not knowing much about snakes. The snake lady’s REALLY bullish but admits to not knowing much about alligators.

And besides, who could predict? Pythons and alligators have never co-existed in the same area before. Although the uncertainty does get some conservative managers get overweight the largely-guaranteed growth of the trees sector, awaiting new data.

I’m having a bit of fun with this, but I’m hoping it sounds familiar. Nature, for me, is the best metaphor for markets. It encompasses the teething mass of conflicting goals, constant adaption and highest stakes.

Nature also can’t be modelled very well. No alligator expert, no matter where or how long they studied, no matter how many environment-related statistics they compile, could have been ready for the Burmese Python. It is unreasonable to expect they could.

And yeah, I did notice that Apple and alligator start with the same letter.

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