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Should John Paulson Apologize to His Clients? Lost Big in HPQ, RIG, NWSA, HIG and Sino-Forest

December 01, 2011 | About:
Jacob Wolinsky posted John Paulson's Q3 investor letter at ValueWalk yesterday. Reading through what seemed like Paulson's 100th apology to investors in the last few months got me thinking about the wisdom of mea culpas to investors. Now, don't get me wrong. I'm absolutely sure he's sorry for the results. The question is more of what he's apologizing for. Paulson has really been caught up in a perfect storm this year. A large number of both his macro and individual stock picks were wrong. He thought the economy would be better by now, benefiting financials. He also picked a bunch of stocks that dropped on company-specific information or that he sold into a price drop, including Sino-Forest, Hewlett-Packard (HPQ), Transocean (RIG), News Corp. (NWSA) and Hartford Financial (HIG).

To be fair, a lot of value investors and hedge fund managers are hurting this year. It hasn't been a good environment to be a stock picker. The unique thing about Paulson is that some of his picks dropped because of things like fraud and mismanagement, not because their true value isn't being recognized by the markets. What are the chances that will happen again? A lot of it can be chalked up to poor luck and a need to put all those billions of dollars to work.

If a portfolio manager's results are poor, but his process was right, then what is there to apologize for? No one can control the short term, and despite what Twitter participants think, one year is still short term in the value investing world. Consistency of process is what ensures long-term success.

That's what worries me about Paulson's apologies. Will it negatively affect his process in the future? Learning from mistakes is certainly a positive, along with tweaking some of his strategies, but is he either going to make wholesale changes to his approach in the future (I doubt it), or is he saying that his approach in the past was wrong (I also doubt it)? If that's the case, then an apology is really a hollow thing and unnecessary.

I'm sure Paulson is sorry that he bought Bank of America (BAC) when it was trading above $10. I am too, but that's not how the game works. If we thought it would be worth $30 at the time, which we did, then we thought we were getting a deal. There's no reason to apologize for that. I just saw how he's buying more BAC in the $5s. I'm glad he is, but that just makes it appear that he believes his original process was correct, doesn't it?

I'm sure Paulson feels bad that one of his funds is down nearly 50% on the year, but feeling bad doesn't mean that he should feel the need to say I'm sorry. He can prove that by keeping the fund's open at least until he gets above their high water mark. In the letter he says he’ll do that. I hope he sticks to his word.

Disclosures: Long BAC

Intellectual Honesty

About the author:

Steven Kiel
Steven Kiel is the president and chief investment officer for Arquitos Capital Management, a Virginia-based investment management firm. He is a graduate of George Mason School of Law and a captain in the Army Reserves. He manages two spoke funds, The Freedom Fund, a value-oriented portfolio, and The Hayek Fund, a portfolio dedicated to free market principles. He can be contacted at steven.kiel@arquitos.com or through the firm's website at www.arquitos.com.

Visit Steven Kiel's Website


Rating: 3.3/5 (16 votes)

Comments

Koheleth
Koheleth - 2 years ago
I don't know the answers, but you raise some good questions.
traderatwork
Traderatwork - 2 years ago


There is no excuse for losing money in bad investment. YTD Return:

MCD(+27.7%)

KO (+4.6%)

WMT (+10.68%)

JNJ (+8.1%)

KMB (+16.41%)

Why do people pay 2,20 to hedge fund when the hedge fund manager enjoy only the upside and leave you in dark to suffer lonely for the downside?

"To the extent that we have been successful, it is because we concentrated on identifying one-foot hurdles that could step over rather than because we acquired any ability to clear seven-footers"

- Warren Buffett

Yes he should apologize and give back his management fee.

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