Dale Wettlaufer  is the founder and CIO of Charlotte Lane Capital Management, as well as an associate professor of business at Columbia Business School. We discuss his research methods, his long/short positions and his view of the central banks.
How and why did you get started investing? What is your background?
I used to go to the office with my Dad on the weekend when I was five or six, and when I was 14, joined the board of directors of a manufacturer my Mom ran. I worked in the plant some summers and then I started reading my Dad’s business books. "The One Minute Manager" and "Iacocca"Â were two of the earliest business books I remember reading. I always thought I’d run the family business, but commercial printing and technical sales didn’t excite me terribly as I got older. I was beginning to get involved in the market around 1993 and after reading Robert Hagstrom’s "The Warren Buffett (Trades, Portfolio) Way," I was hooked. The Motley Fool generously allowed me to learn and write about value investing and by 1999, I joined Bill Miller’s team at Legg Mason Capital Management. So, I’ve been involved in business since 1983 and the stock market is just an outgrowth of my interest.
Describe your investing strategy.
Find the mispriced asset and commit capital to it, long or short. That could be a growth company, a terribly junky value situation, or anything in between. I can own things at 5x earnings, 100x, or N/M and I can be short those as well. Near-term multiples are the biggest liars in the market. I pay attention to how capital is being invested by the company and its competitors and where we are in the capital cycle for that industry. My analytical time horizon is generally 5-15 years because that is the time horizon I believe the market normally discounts. Looking out over that horizon and discounting cash flows, if I believe there is a significant enough deviation in the price of a company’s equity or credit from what I believe those are worth, I’ll commit capital.
That’s the “why” of my strategy. The “how” is read all the time, talk to people as much as possible, hypothesize and test counter arguments, talk to issuers as well as people in the field, constantly take apart business models and read financials and filings, pay as much or more attention to how companies fail as how they succeed, stretch your knowledge and learn new industries and companies, and imbue yourself in as much data as possible. The brain is incredibly complex and can handle more unstructured data than I think we realize.
Pay as much attention to the new high list as you do the new low list. The time to study things is when there’s no pressure to buy. When it’s time to act, the window for action is often too narrow to study something well.
The “what” of the strategy is: Charlotte Lane, my investing vehicle, is a liquid alternative strategy focused on mid-cap and large-cap equities with a bit of credit. The strategy is wide open: I can be 100% long or longer and I can be 100% short. I’ve been short for nearly three years and am very close to neutral at the moment. The goal is to increase, over the cycle, partners’ after-tax purchasing power at a risk-adjusted rate greater than a passive equity strategy.
What drew you to that specific strategy?
I am a mashup of Warren Buffett (Trades, Portfolio) and Bill Miller, as well as innumerable investment practitioners and thinkers. Ben Graham and Michael Mauboussin would top that list. I beg, borrow or steal insight from anywhere I can get it. Leon Levy, for instance, was a great practitioner who is fading from the industry’s memory, unfortunately. I like to re-read his work as well as Peter Bernstein’s. Jim Chanos (Trades, Portfolio) was on the other side of Kodak (KODK, Financial) from us and killed it. When we and I were humbled on that, I began to study why we and I failed and how someone could see it from the other side. Jim is not just a good short seller, but one of the most consilient generalists I know of.
What books or other investors influenced, inspired or mentored you? What investors do you follow today?
I covered some of this above, but I think everyone should read Graham & Dodd, Buffett’s shareholder letters, anything Michael Mauboussin has ever written, and Arnott and Bernstein’s “What Risk Premium is ‘Normal?’” Supplement those with as many business case studies and biographies as possible. I list my favorites here.
I don’t really follow many contemporary investors I can’t talk with. I read the daily news flow and pay attention to all the known names, but I have no idea why many are doing something unless they explain it fully via an interview or primary source material. Even then, I’d have no idea how their thinking is evolving.
The people I talk with directly, who run a variety of strategies across the world, influence, mentor and inspire me. You’d know some of the names and many you wouldn’t. Peter Rabover at small-cap shop Artko Capital is a very talented emerging manager I talk with often. Dan McMurtrie at Tyro Capital Management is only 24 or so, but will be a star in this field. We’ve torn apart a few companies and he’s showing me the next generation of primary research technologies. It’s very important to keep in touch with the next generation and understand there’s something to be learned from them. Three of my best friends work for large long-only firms and I listen intently to whatever they have to say. Some people I talk with are not in the market professionally, after distinguished careers in it, and their views are especially important.
How has your investing changed over the years?
I have a better-developed strategy for average down than 15 years ago. In the 2001-2002 downturn, we took 90% drawdowns on some positions, averaging the whole way, which then went on to be 5-20 baggers from our cost basis. I realized sometime afterward it wasn’t entirely our brilliance or resolve that created those returns; we actually got bailed out by Alan Greenspan. That realization colored my approach to managing things in 2008-2009 and from that point forward, especially on how to average stocks in industries exhibiting left skewed return distributions.
I am less and less shocked by board missteps and derelictions of fiduciary duty and use that more as an input into avoiding a long or shorting. When the value destroyers have been shown the door or have stopped doing inadvisable things, sometimes I’ll be the guy buying with an idea of how the stock has gotten so destroyed. Normalization from that bombed-out state can be very rewarding.
Name some of the things that you do or believe that other investors do not.
I care less and less what the other fellow is doing. I can’t control it. Investing is like golf – you focus on your own process, manage the inevitable mistakes so they don’t blow you up, and make hay when a hole sets up for your strengths. I am always focused on expectations embedded in stock prices and try to figure out why they may deviate from my assumptions. I concentrate lots of energy on improving my ability to forecast a realistic outlook for a business or an industry, which forecast must contain integrated financial and strategic assumptions.
What’s the base rate of long-term earnings growth in US mid- and large-caps? What’s the base rate of duration of competitive advantage for different sectors? I don’t know how others do this without knowing those things or how they forecast the future with at least some idea of what the past has looked like. I keep all my old models so I can audit them and improve my forecasting.
I probably pay much more attention to a company’s credit than the average equity-focused investor. If I can get contractual cash flows senior to equity, with an equity-like return, then the stock had better offer a far better return that credit. There are scores of practical and theoretical applications to that thought.
One thing I may do differently is reject the idea it’s “better to be roughly right than precisely wrong.” That observation from Buffett has unleashed a torrent of belief that it’s ok not to be explicit about the growth rate of a company, its future margin structure, its future capital needs and disbursements, and its future return on capital. When we slap a P/E on a stock and throw up our hands in saying “DCFs don’t work,” we merely pack into that earnings multiple all our implicit assumptions. You can choose to state your forecast or you can choose not to, but you’re always making a forecast in active management of securities no matter which course of belief you advertise..
I choose to be explicit because I can audit how those assumptions have developed versus reality. I prefer to be explicit and acknowledge the imprecise nature of a DCF versus assuming everything important implicitly in using a very blunt set of multiples. A DCF is imprecise, but it’s naive to believe a P/E ratio or an EV / EBIT ratio is somehow more precise, especially with “earnings” today being presented so often as gussied-up pro-forma fantasies.
However, after 20 years of doing DCFs, I think I’ve grooved my brain pretty deeply in looking at something quickly and getting a feel for how a company’s current position could unfold in the future given a few key drivers. All that DCF work is basically training my brain to process without Excel lots of factors, which allows me to be more creative on qualitative factors. I still model 90% of my positions, though, and maintain those models. Besides, Warren’s brain is Microsoft Excel (MSFT, Financial). We lesser mortals need help.
Finally, perhaps I think more intensely about how things can fail or stagnate while others think intensely about how things will succeed. I grew up in Buffalo, New York, which was a top metro area in 1900 and was a premier growth “stock” from 1825 to that point. It became a blue chip industrial for the next 50 years and then fell into value territory and then deep value territory with the gutting of industrial America, Love Canal, high taxes, two huge S&L failures and baffling public policy. It’s now very much on the upswing. The capital cycle is a natural thing we resist at almost all levels, including investing in public equities today and including the Federal Reserve. Maybe because I’ve been around business throughout my entire sentient life and have strong memories of every recession since the mid-1970s, I am more aware of how failure happens. That informs how I invest both long and short, in growth and value situations.
But hey, whatever works for you. I can be insouciant at times and point out things I disagree with, but truly the market rewards so many different approaches. I respect anyone with a repeatable process that can produce recurring alpha long term.
What are some of your favorite companies? Where do you get your investing ideas from?
Costco (COST, Financial) and Amazon (AMZN, Financial) are two favorites. I love companies that compete with capital velocity, taking only enough of a margin slice of the addressable revenue pool to satisfy their return needs. They’re hellacious to compete with and I love how they deprive others of breathing room. I am a fan of Wegmans, a private supermarket. Its box size is huge, it prices like Wal-Mart (WMT, Financial) in the center of the store and adds edge-of-store offerings that are better than Whole Foods’ (WFM, Financial) at a lower price and more in touch with the mass market. This company is like an Abrams tank on a Civil War battlefield. Aldi and Trader Joe’s are also outstanding.
I also prefer companies where insiders have hard capital on the line, where family wealth is riding on the company’s capital allocation decisions. Most S&P 500 corporations have hired hands at the helm who get rich no matter what happens. If things go poorly, they re-price options and walk away rich. If things go really well, they retire super-rich. This is a very poor incentive structure that drives risky behavior of all sorts. The dislocation of principal outcomes and agent behaviors is a problem I see not just in corporate America, but in Congress. Almost everyone is trying to get through the quarter, fiscal year, or next election cycle instead of thinking about how their decisions will look in 10-50 years.
I will add I don’t look at 13-Fs very much. If I were directing a movie about Wall Street, there would be a scene in which a PM says to her analyst “See, Fund X is buying it and they’re smart. Let’s add.” Quick cut to the offices of Fund X, where the PM is saying to his analyst, “See, Fund Y is buying it and they’re smart. Let’s add.”
I’ll look at a company and then analyze the value chain, comparing things across industries and geographies, wondering where a company gets its revenue and where they lay out operating and capital expenditures. That leads in all sorts of directions and after 20 years, you just build up a warehouse of situations, ideas and data. Last week, I was comparing a hospital operator that had been decimated by bad M&A and poor industrial development and compared that with the valuation of Deere (DE, Financial) and Caterpillar (CAT, Financial). It yielded meaningful insight, as far as I’m concerned, given the overlay of drivers that effect all three.
Do you use any stock screeners? What are some methods to find undervalued businesses apart from screeners?
No. I haven’t found screens to be that useful. I talk to people and dig in industry-by-industry, company-by-company. I dig at multiple companies weekly and start pulling at threads. I pull things out of the warehouse and check-in. Length of experience should help in this business. Let’s say you cover staples and you see a good CFO just left one company to run another company. You think that CFO is great for his capital allocation philosophies and organizational leadership. Maybe he ends up at some horrible company that looks blah and is trading at 18x earnings. Your commoditized stock screener isn’t going to capture that. But I do know of at least one very good investor who is now screening by people she thinks are value-creative, so maybe I just have the wrong screens. I just don’t like the P/E * ROIC and price / book types of screens. If I cut off the investing universe to companies with 15% hard capital insider ownership and no debt, I could live with that.
Name some of the traits that a company must have for you to invest in. What does a high quality company look like to you?
The only trait that is important is expected excess return. It would be super if Brown-Forman (BF.A, Financial) traded at a 7% FCF yield every day, but that’s happened for like 3-4 weeks in my entire career. Right now, I am highly exposed on the long side to high-quality firms with management or boards that have real, hard capital on the line. But I also have very shakily-run companies like Twitter (TWTR, Financial) or Community Health (CYH, Financial) in the long portfolio. On the short side, I’m exposed to value traps, historically higher-quality companies I believe are overpriced, cyclical companies that are priced for a new business cycle I don’t believe is materializing, companies that have been run too hot on margins and production levels, and some corporate governance and capital allocation disasters the market hasn’t figured out fully.
Many of the companies I am short are run by rentier management teams who get paid in options and really aren’t risking with their fiduciary choices their family’s well-being (but have no problem risking the livelihoods of tens of thousands of families in their employee bases).
The best company is one that produces lots of cash relative to current enterprise value and can reinvest all of it at high rates of return.
What kind of checklist do you use when investing? Do you have a structure or process that you use?
We’re not flying a plane or performing surgery. I don’t think strict checklists (on paper, where you check 25 boxes before taking off) are a great idea in this pursuit. There is structure in how I go about thinking about supply / demand characteristics of an industry, where we are in terms of margin history, the rate of growth for a company and an industry, the competitive responses these will elicit and valuing all of that. But I am not a big believer in “Must be at least 20% ROIC, has to have grown at 6% or more for the last ten years…” Nothing fails like success and nothing succeeds like failure. I am more wary of a long run of success and high returns than I am of many things in investing.
Before making an investment, what kind of research do you do and where do you go for the information? Do you talk to management?
I like to talk with management or at least investor relations. I don’t need their framing of things, but I like to be able to ask questions I want addressed. Sometimes that’s not an option. I love expert networks, not to find out what the quarterly print looks like (I wouldn’t ask), but for talking with people in the field. I find very high ROI in lining up 20 calls in a week with distributors across the U.S. for a new product versus going to a trade show and chatting up random people who are actually trying to sell versus satisfying the curiosity of a Wall Street guy.
I have a network of people I’ve worked with and met over the years and it is a huge pleasure to work with them. It’s fun to come across so many people and share ideas that, in many cases, aren’t actionable immediately but add to my thinking and knowledge. Twitter has also been a major godsend. This is a massively robust network of investors around the world and we constantly bat stuff around publicly and privately.
While my sellside access isn’t that spectacular at the moment, I have always valued these relationships. I am not a fan of sellside bashing from by the buyside. I don’t need someone’s model or investment recommendation, but the knowledge base and deep information, insight and historical understanding possessed by many smart sellside people are a veritable gold mine. Sellside sales people are also incredibly adept at helping you get to answers. A few key friends in sellside sales have been with me almost every step of the way and have produced nonstop.
Back in the credit crunch of 2001-2002, our salesperson from Bear hooked me up with some information on UnionBanCal, which helped me dimensionalize their shared national credit problem. I sent a glowing note to Ace Greenberg because I was so enthusiastic about their coverage and resources translating into actionable insight. A few days later, the phone rang, I picked it up, and a voice on the line says “Dale? This is Ace Greenberg.” I was excited that he called, sure, but I was most pumped about maximizing the resources at hand to provide something of value for our clients.
So the bottom line on doing this well isn’t being super-scale or being niche. There’s no secret, trumping virtue in either. It’s coming to work every day, ready to give your maximal effort with whatever resources you do have. That’s how a pro works and gets to the next level and the next in terms of client outcomes.
What kind of bargains are you finding in this market? Do you have any favorite sector?
My long book is quite idiosyncratic right now. I have one food company that has been in chapter 11 twice in the last 12 years, a credit collection agency the high quality of whose internal financials I can see in their static pool data (that is absolutely despised by many shorts), a recently spun-off private label credit card issuer that has over 13% tangible common equity to assets and is selling at 10x 2016E EPS, and an additive manufacturing company that is reinvesting almost every dollar they are producing to drive new category growth, among other positions.
On the short side, my largest position is a closed-end high yield fund that is trading at a 50% premium to NAV, is paying distributions out of asset sales to maintain the distribution, has a horrendous coupon roll-down problem as high yield debt prepays or matures, and which has cut its distribution once in the last year. I think it will again. Plus, the real yield in high yield, less net defaults, provides close to no return currently, so it’s a horrible asset class in general.
I’m short low-volatility, “safe” compounders that aren’t compounding and aren’t that safe. Another short is a commodity-driven transport company that is absolutely killing its customers via oligopoly / monopoly pricing behavior. I can see their pricing power eroding badly and tonnage fleeing to seek out alternative transport modalities. But this has been a great sector for 15 years and I believe investors don’t see the dangers in this pricing behavior. At a 4-5% FCF yield on my 2016 and 2017 numbers, this 9% ROIC company with incremental returns on capital at 0% is not at all a bargain. Quite the opposite, in my opinion.
One integrated energy company I’m short insists on maintaining a dividend of $4+ per share while its FCF per share has undershot that dividend by $5+ to nearly $10 over the last three years. So its reserve replacement ratio will soon start melting (I think it already is, given the inherently estimated nature of PV10 assumptions). The sweetest sound in this kind of short is management insisting the dividend is sustainable. Maybe it is, as long as the capital markets are open, but selling assets and running down reserves is a losing game when the only thing keeping the stock up is a dividend yield well in excess of the earnings and FCF yields.
I could go on, but the expected excess return in my shorts is far better than that of my longs. I would be shorter, but after the Fed punted following the May payroll report, Brexit put the Fed largely on hold, and whatever that was at Jackson Hole in August, I got out of the way of the world’s central banks and am nearly flat in terms of market exposure.
How do you feel about the market today? Do you see it as overvalued? What concerns you the most?
I’ll provide my bearish view of the world in a few ways below.
The earnings yield on the market is at one of its lowest levels since 1871, which is perhaps justified by low interest rates. But if the return on new investments is equal to WACC or below (as it is now, at anywhere from 1% to 6% depending on asset lives), that does not justify this high valuation, especially when the continuing value component in equities (NOPAT, capitalized at WACC) has been shrinking.
We are at a lower earnings yield than the 1950s and interest rates aren’t very different than they were in the 1950s. At that moment, all our industrialized competitors had been destroyed and the U.S. was producing huge excess returns for both labor and capital, to the point where we thought we were so rich we would expand in the 1960s major entitlements programs. Those programs now provide 20% of disposable personal income in the US. That will keep growing every day and will necessitate funding via higher taxes or higher borrowing. That is unless we have a truly spectacular surge in secular innovation that benefits consumers and not just producers.
Home prices versus household incomes are approaching 2005-level highs, real disposable personal income per capita is growing at a very low rate while the country’s systemic leverage is ticking off new highs, productivity is negative, strained state budgets are being fobbed off on students who are paying higher tuitions yearly and the ill who are incurring higher healthcare costs yearly, industrial production is very weak, durable goods orders have been dropping all year, consensus capex estimates are very weak, wholesale inventories / sales are just off 24-year highs ex 2008-2009, and corporate profits have been declining for five quarters. China’s credit creation YTD is about $1 trillion on a $3 trillion economy and their wealth management product landscape looks like CDO-squareds in the U.S. circa 2007.
The U.S. produces about 25% of global gross economic product with 4.5% of the world’s population. Growing at even 2% real and 4% nominal is a very tall task with slow growth everywhere around the globe. Every 1% of growth in U.S. GDP per capita would equate to more than 7% growth in real GDP per capita for everyone else in this world. Where does that come from here if productivity is negative and your customers are globally are all hurting? Sure, we have innovation and infrastructure, but 2% growth and 2% inflation aren’t preordained numbers we should build all policy around.
Let’s look at it one more way. An equity can be regarded at as a bond with an attached call option. There is the bond-like continuing value of the enterprise (capitalizing today’s earnings at some rate, treating it as a perpetuity) as well as the present value of growth opportunities, or PVGO. If continuing value falls through a decline in profits, interest rates and equity risk premium held constant, then PVGO has to carry more of the weight of the firm’s value. If we can see new projects are yielding smaller and smaller returns that fall below the cost of capital, then support for the PVGO component in equities becomes more tenuous.
Finally, historical returns on capital don’t matter to valuation. It’s what happens on the margin. A company with a 100% ROIC investing in new projects yielding returns of 8%, when WACC is 8%, is worth no more than 12.5x NOPAT (the reciprocal of 1 / WACC), given the NPV of future FCF from those investments, less the NPV of future investment outlays, is zero. The market ex financials and energy is trading at 22-27x NOPAT, depending on your tax rate assumption. There is a lot of growth combined with a very long duration of competitive advantage assumed in today’s valuations broadly. It’s an unrealistic package of assumptions, in my estimation.
What are some books that you are reading now?
"Harry Potter." My 7-year-old just raced through it in four days and I need to catch up. Jim Grant’s "The Forgotten Depression: 1921" was excellent. I burned through very quickly "Citizens of London: The Americans Who Stood with Britain in Its Darkest, Finest Hour" as well as "Habit of Labor: Lessons from a Life of Struggle and Success" by ISCAR founder Stef Wertheimer. I am slowly reading T.J. Stiles’ biography on George Custer and Alfred Sloan’s business autobiography "My Years With General Motors." In my on-deck circle are "Shoe Dog: A Memoir by the Creator of Nike"Â and Boston Beer Company founder Jim Koch’s "Quench Your Own Thirst."
Any advice to a new value investor? What should they know and what habits should they develop before they start?
Get out there and lose some money. That’s the way to learn. If you’re in the business, meet as many management teams as possible and then monitor over the next few years how wrong they were and how often they were very wrong. Management teams at many publicly traded companies are, in many instances, in the business of selling hope and dreams to themselves, their employees and investors. The world is much tougher than that. If you added up all the growth plans of every S&P 500 company and their margin and return projections, as stated 15 years ago, GDP would be far higher, we’d all be much richer, and everyone would be producing a 20% return on capital with endless growth opportunity. That’s not how it works. I advise my MBA students to understand the base rate of failure and the low odds of durable super-normal returns for corporations and money managers.
Read all the time. Work your tail off.
What are your some of your favorite value investing resources?
The best movie about Wall Street is, in my opinion, "Other People’s Money," in which the protagonist has a computer he named Carmine. This fellow, Larry the Liquidator, obviously loves Carmine. I feel the same way about my Bloomberg. It’s my window into so much of the world. Other than that, I gather lustily data and insight from wherever I can get them.
Company IR websites are great as is the good old SEC EDGAR website. Getting primary literature from companies these days is so much better than the pre-EDGAR days. Of course, this makes the market more competitive (I’d say efficient, but many seem to have a hang-up with that term).
Describe some of the biggest mistakes you have made value investing. What did you learn and how do you avoid those mistakes today?
Two words: Eastman Kodak. Legg Mason Capital Management had a big position on when I arrived in 1999 and it was put on my desk to cover. I had never given it a moment’s thought before that and I leaned over to a fellow analyst and said, “Oh my god, This is a [disaster].” But I was a newbie and I was working for one of the all-time greats who saw something in the situation. I was very green in deep value and I adopted his point of view on the investment merits of the situation after I did the work on it.
Mistake #1: Do not ever adopt anyone’s viewpoint without seeking out as much or more disconfirming evidence as confirming. Develop your own viewpoint, no matter what. There was a long case to be made in Kodak, which I’ll skip here, but that case eroded, from the get-go, almost every quarter for years.
In 2003, I went to the Kodak analyst day, at which the company laid out a new vision for advancement, comprised of M&A and a big dividend cut. I had been in the industry for nearly four years and was getting the gist of how M&A-driven growth most often derails a company. I came back to Baltimore and reported what I saw as bad news, which wasn’t received all that well. When you’re still a junior analyst on a team and your conclusions don’t go over well, you have to manage your career. So I went home and wrote a 13-page report on the details of the analyst day. I still have that note, which is incredibly bearish in its content. But I meekly and embarrassingly concluded, “I don’t agree that this is either a buy or a sell here, as the risk profile has changed such that the stock is only mildly attractive here.”
Painful.
Mistake #2: I wanted this thing gone and didn’t step up to say so. The best I could muster is ‘there’s very little excess return in this.’ Managing the people who manage you is a tricky thing for any analyst, especially young ones. The lesson here is: put the headline at the top and be declarative about the action you want to see. Even if it endangers your standing in a firm. Figure out how to state it without threatening the client / PM. Don’t hide from your conclusions. Support them strongly. If you’re not married and don’t have a child, you have more freedom to do so! Luckily I had created enough value elsewhere at the firm I wasn’t that worried.
So, there are a couple mistakes in there, but from a security analysis standpoint, this situation had it all from a short perspective. A dying technology, a management team that was going hog wild on M&A, off-balance sheet liabilities galore, restructuring actions that resulted in real and massive cash outflows, and leverage. That’s a lot to deal with as your first assignment as a buyside analyst, but Kodak was the best thing to happen to me. My career and life would not be the same without it, for good and bad. I am a far better investor for having dealt with this early in my career.
Avoiding mistakes? Investing is not about avoiding mistakes entirely, it’s how bad the mistakes are when you’re off. It’s also about not repeating the same mistakes. That’s vitally important. An investor who makes no mistakes is not really growing. An investor who repeats the same big mistakes over and over, who can’t explain them, who blames others, and can’t introspect should probably be avoided.
How do you manage the mental aspect of investing when it comes to the ups, downs, crashes, corrections, and fluctuations?
Drawdowns don’t bother me. Crashes? That’s where great values are born. I become more focused in those moments. In 2008-2009, as I watched the money market freeze, I remember thinking of Pearl Harbor. If you’re being attacked, you get on the anti-aircraft gun and you focus on the target. You either die or you get through it. Now, Wall Street isn’t war, but when you’ve got a baby on the way and a big mortgage, it may as well be. I didn’t have time to worry and I kind of like hairy situations anyway. If one can’t handle fluctuations, this is not the job for you. But if you put on risk like risk will always pay off and you hit a correction or crash, I don’t know what to say to you.
Our job is to preserve and grow client capital. As Warren Buffett (Trades, Portfolio) said, and I’m loathe to appeal to a higher authority, “Be fearful when others are greedy and greedy when others are fearful.” I look at expectations embedded in equities and credit and I look at how wealthy individuals and institutions are positioned in their exposures to equities, credit, private enterprises, real assets, inventories, and employment levels and I don’t see what else there is to be bullish about, on the margin.
Everything we do as investors deals with “what’s next. What’s the marginal factor that matters?” Almost everything on the margin looks negative to me. Does that worry me? Not in the least. I find it interesting and I see a rich vein of value to be mined out of this set of problems. I am very excited about additive manufacturing, materials sciences, biotech advances, green tech and alternative energy, robotics, autonomous and electric vehicles, global sensor coverage… there are so many interesting things happening that will make the world better.
I’m not flat the market and I haven’t been short it for nearly three years for an impending implosion. I see an overvalued market combined with a rising likelihood of a normal industrial recession. I’m an optimist and I do see human ingenuity and good incentives at work every day. Their good effects have only been blunted by bad monetary and fiscal policy, not stamped out.
We’ll figure it out as a society. But the market in general? It already discounts a smooth solution and a soft landing. Valuations imply good growth and increasing returns on financial and human capital across the US economy. I think we face a poor risk / reward payoff structure of that playing out minus the probability of an unpleasant interim path for the economy, equities, and credit.
Disclosure: No position in the stock mentioned.
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