In Bruce Greenwald’s bookValue Investing: From Graham to Buffett and Beyond
a chapter is devoted to legendary value investor, Michael Price. I learned a lot about Michael Price’s investment style in this chapter. I think one of these lessons is especially valuable today in the low yield environment we live in.
Many value fund managers like to keep a significant chunk of their assets in cash. This depends on whether the manager/s can find enough stocks with a margin of safety. Managers will also keep cash so that in if the market crashes they can deploy this cash to purchase stocks at a cheaper price. Seth Klarman is well known for keeping 30% or more of his portfolio in cash at any given time.
Michael Price takes a different approach as described by Bruce Greenwald. Michael Price had a strategy of keeping two thirds of his investments in “cheap stocks”, and the other third in arbitrage, bankruptcy situations. He made sure that his cash level never fell below 5%.
However, there was a reason for this strategy. Cash is market neutral. If anything a market crash will likely cause T-bills or other cash equivalents will go up in value. However, having a large percentage of one’s portfolio in cash could be a big drag on performance. It takes geniuses like Seth Klarman to be able to crush the market while holding such a large percentage of his portfolio in cash.
Price invested in bankruptcy, and arbitrage situations to ensure a third of his portfolio was market neutral. The bankruptcy positions usually moved according to the latest legal proceedings and were far removed from the economy or stock market. Price invested in arbitrage positions that involved mergers in publically announced deals.
Price saw these investments as similar to cash yet producing a far higher yield. Price on average returned between 15-20% on these market neutral investments. He tried to have 5-10 positions out of the 300 or so deals that were available and liquid. On average these investments were 40% less volatile then the market.
So what lesson can investors learn? Today yields are ultra low. Many money market accounts are paying less than one tenth of a percent. Using the rule of 72 the money will double in only a few thousand years. However, using Price’s strategy could give an investor a high yield that is market neutral.
However, this approach is not perfect. Only cash is cash. T-bills are almost like cash. You will not lose your principal. However, bankruptcy, and arbitrage positions involve the significant loss of capital and depending on the case might not always be market neutral. In addition, liquidity is an issue especially if you are managing a lot of money. T-bills on the other hand are highly liquid. So while Michael Price’s strategy can be especially valuable in a time of low interest rates, it does entail a lot of expertise, and risk and must be practiced with a high degree of prudence.
a chapter is devoted to legendary value investor, Michael Price. I learned a lot about Michael Price’s investment style in this chapter. I think one of these lessons is especially valuable today in the low yield environment we live in. Many value fund managers like to keep a significant chunk of their assets in cash. This depends on whether the manager/s can find enough stocks with a margin of safety. Managers will also keep cash so that in if the market crashes they can deploy this cash to purchase stocks at a cheaper price. Seth Klarman is well known for keeping 30% or more of his portfolio in cash at any given time.
Michael Price takes a different approach as described by Bruce Greenwald. Michael Price had a strategy of keeping two thirds of his investments in “cheap stocks”, and the other third in arbitrage, bankruptcy situations. He made sure that his cash level never fell below 5%.
However, there was a reason for this strategy. Cash is market neutral. If anything a market crash will likely cause T-bills or other cash equivalents will go up in value. However, having a large percentage of one’s portfolio in cash could be a big drag on performance. It takes geniuses like Seth Klarman to be able to crush the market while holding such a large percentage of his portfolio in cash.
Price invested in bankruptcy, and arbitrage situations to ensure a third of his portfolio was market neutral. The bankruptcy positions usually moved according to the latest legal proceedings and were far removed from the economy or stock market. Price invested in arbitrage positions that involved mergers in publically announced deals.
Price saw these investments as similar to cash yet producing a far higher yield. Price on average returned between 15-20% on these market neutral investments. He tried to have 5-10 positions out of the 300 or so deals that were available and liquid. On average these investments were 40% less volatile then the market.
So what lesson can investors learn? Today yields are ultra low. Many money market accounts are paying less than one tenth of a percent. Using the rule of 72 the money will double in only a few thousand years. However, using Price’s strategy could give an investor a high yield that is market neutral.
However, this approach is not perfect. Only cash is cash. T-bills are almost like cash. You will not lose your principal. However, bankruptcy, and arbitrage positions involve the significant loss of capital and depending on the case might not always be market neutral. In addition, liquidity is an issue especially if you are managing a lot of money. T-bills on the other hand are highly liquid. So while Michael Price’s strategy can be especially valuable in a time of low interest rates, it does entail a lot of expertise, and risk and must be practiced with a high degree of prudence.
