Two weeks ago, Beyond Proxy posted a link to an interview with Mark Massey of AltaRock Fund (link). I’ve never heard of Mr. Massey prior to that point, but his record suggests he’s clearly worth listening to: Through August 2011 (the most recent data I could find), he has outpaced the S&P 500 by more than 300 basis points per year for 20-plus years, despite having 30% of the fund’s assets (on average) in cash equivalents. Based on the intro to the Beyond Proxy interview, it sounds like his performance has been even better over the past four years (looking at some of his investments from a few years ago, including Domino’s (DPZ), Mohawk Industries (MHK), and Carter’s (CRI), it’s not difficult to see how).
I’d like to discuss a few answers from the interview. Let's get started.
DIVERSIFICATION
Among the many things I learned from all this reading were three important facts: 1) The most highly regarded investor(s) of all time preached incessantly that it was pure madness for professional investors to own much more than a handful of positions, 2) most investment businesses were either unaware of this or had chosen to ignore it, and 3) over the long-term, most of them fail to beat the market. I find these three things as fascinating today as I did 12 years ago.
Massey has clearly taken this to heart: As of their most recent 13F-HR filing, AltaRock held just six positions. They’ve clearly been quite successful with this approach.
Of course, this isn’t anything new; we’ve all heard this before. Presumably the vast majority of professional investors have as well. Personally, I find this fascinating as well – but I don’t find it the least bit surprising. The reason why is clear, as suggested in the second point: many investors / fund managers choose to ignore this because of career risk.
The more time I spend in this industry, the clearer it becomes that underperformance over any period of time is considered the kiss of death. We can have a long discussion about why that’s the case (failure to speak frankly with clients, an inability to turn down clients with different expectations than the manager, etc), but the reality is that it’s applicable for the vast majority of investment professionals. There are very few investors that not only address the issue head on, but warn their investors in advance that they will underperform over time (and even then, it might not do them any good); it’s not a question of if, but when.
Look at Massey’s own track record (here). We can see that in his first decade as a portfolio manager, he essentially “tied” the S&P 500. He opened a significant lead up to 1995, only to see himself trailing the S&P 500 since inception a few years later (looks like 1998). Clearly he is not alone: If you manage money long enough, it’s a near certainty this will be you at some point – and when that happens, you’re likely to lose a good portion of your AUM.
Most professional investors fear that above all else – including an unspectacular long term investment record. The cost of being wrong is simply too high; closet indexing is the answer to potential underperformance. Of course, it’s impossible to beat the market when you essentially own the market; add in the costs associated with money management, and your investors will be lucky to match the indices, let alone outpace them.
As an individual investor, or as a professional who is willing to bear the “cost” associated with diverging from the indices, this offers a clear path and opportunity for better-than-average returns.
CIGAR BUTT INVESTING
To me, deep value “investing” means buying a less than great business or a pile of assets trapped inside of a corporation at a (hopefully) big discount to some estimate of intrinsic worth. My problem with this approach is that no matter how cheaply you buy, time is working against you. In other words, your risk/return equation is highly dependent upon how quickly you can turn around and sell at a profit. With poor companies and cheap assets, the values can melt away while you are waiting for the market to see things your way. Buffett said it well, “Time is the friend of the wonderful business and the enemy of the mediocre.”
I’ve long agreed with that sentiment, though I must admit that I’ve never even tried the “cigar butt” approach to investing. I’ve always been too scared of the combination of an unknown time frame and the potential “melting” of value. I know there are plenty that disagree, and clearly Warren Buffett (Trades, Portfolio) himself used this approach early in his career (along with plenty of other very successful investors). At the end of the day, I simply feel more comfortable with the approach Massey recommends (“buy a select group of excellent businesses when they’re cheap, and wait patiently as they compound our money at superior rates over the long term”).
FINDING IDEAS
It’s all qualitative stuff. We really don’t do screens. In fact, the only screen that I find useful is one that spits out companies that have been buying back a high percentage of shares. This MAY be indicative of a well-aligned management team that has great conviction in the durability of its competitive moat… but it could be the opposite, too… so you always have to do a lot of work to get to the truth.
Like the prior point, I know there are investors who are comfortable – and have been wildly successful – by running screens and building a basket of the cheapest stocks (as measured quantitatively). In my opinion, “doing a lot of work to get to the truth” can potentially result in a different perspective than the crowd with the facts to back you up; that’s a great spot to be in when you can find it. This is an approach that’s a lot less crowded, potentially leaving mouthwatering opportunities for the few investors out there willing to put in the requisite work.
By the way, you’ll have a tough time doing this type of work if you feel the need to hold 50 different positions in your portfolio; clearly this has implications for the first point discussed above (concentration).
CONCLUSION
If you didn’t click the link to the interview from above, don’t skip this one (here) – it is well worth your time; I found what Mr. Massey has to say about Moody’s (MCO) particularly interesting. I hope you enjoy what he has to say as much as I did.
It looks like Mr. Massey has largely stayed out of the spotlight, and I could only find a few of his old investor letters. Here are some other links that are worth looking at:
Also check out:
