Even the Legends Are Losing in Today's Markets Graham Summers July 11, 2008 Yikes. If anything reveals the difficulty of investing in todayâs market, itâs the fact that investing legends have been losing money hand over fist. The market has fallen over 12% in the first six months of 2008. Meanwhile, many of the worldâs greatest investors have lost more⦠a lot more. The Website www.Gurufocus.com tracks the investments of the worldâs greatest investors. All told, it follows 55 investors, everyone from Warren Buffett to Seth Klarman, the super secretive manager of Baupost Group, who has averaged 20% a year for more than two decades and only posted a single losing year in the bunch. All told, only four of the 55 made money during the first six months of 2008. Let that sink in for a moment. The best of the best are losing money. Some of the biggest names in the bunchâguys like Marty Whitman and Eddie Lampertâare trailing the market by as much as 20%. The ten worst performers were: Legend 6 Month Performance Marty Whitman -43% Mohnish Pabrai -41% Bill Miller -37% Joel Greenblatt -37% Eddie Lampert -28% Robert Bruce -25% Bruce Sherman -24% Charles Brandes -24% Robert Rodriguez -22% Mark Hillman -21% Are these guys secretly idiots, guys who simply got lucky for a few years but really donât know what theyâre doing? Maybe. But I doubt it. You can underperform dramatically for a number of years and still maintain an average that beats the market over time. Richard Pzena, an investing legend in his own right, spoke about this in his 1Q08 conference call. Since the inception of his firm, Pzena Capital Management, Pzena has outperformed the market by nearly 4.5%. Hereâs what he had to say about down years: A very simple strategy, buying the lowest price-to-book stocks over the past 50 years based on the cheapest quintile of the largest 1000 stocks would have resulted in a return of about 200 times the initial investment versus about 60 times for the S&P 500. But along the way, there were 8 times you would have lost 20%. As Pzena notes, by buying the cheapest, largest stocks in the market, you would outperform the S&P 500 by nearly threefold. However, even by focusing on the deep value portion of the market, you would still experience eight years when youâd lose 20%. So while investing legends may be having a tough year, I have little doubt theyâll bounce back quickly. Often times the greatest test of an investorâs ability is not what he does when heâs up, but what he does when heâs down. And I wouldn't want to make a bet against these guys.
People keep following the same ideas over and over without actually taking a look and reviewing on a daily,weekly,monthly basis the situation around us. I mean how could anyone miss the obvious signs? When they started to lend money to anyone who could mark an X on a mortgage application and homes in the middle of nowhere going for 500K with unemployed folks getting approved for them I knew it was time to cash in the chips and go bear. early 06 I pulled all the stops, cashed in all my positions in financials/banking and took a bearish stance. The writing was on the wall. How did they fail to see it, simple they got cocky and thought they can always make double digit returns without making too much of an effort and following the same routines. On another note, do not try to follow other peoples footsteps or coattail. Do your own due diligence and homework, cause the driver might be good but the day you decide to follow he might be driving off the cliff.
Trading is zero sum, somebody's winning. I dont care who is winning and who is losing as long as I'm not losing.
Let's see, the market is down the last 6 months, and so are > 90% of the legendary traders. Seems their performance might be similar to the concept that a stock index usually outperforms most funds.
What kind of bullshit is that "trading is a zero sum game"???? do you know what is the average short interest on stocks?
Lets not confuse trading with investing. The people mentioned are mostly investors, who probably only go long and can't be nimbe because of the amount they are managing. It is to be expected they could be down if the market is down so much in a short time. On the other hand, traders who go long and short and trade all sorts of combinations should be judged differently.
It's useful for most investors and traders to see the downside of value investing - utter catastrophe during a genuine bear market. Even Buffett got totally creamed in the 1973-74 bear. Ben Graham was ruined in 1929-32. This is why trading/speculating is superior to investing IMO. The funniest thing is what will happen if the bear gets really serious e.g. S&P 1000. A lot of these guys will be down 50%+. I have to say as well, that many on this list demonstrate an utterly appalling disregard for risk control. To be down 30%+ in a year is shocking. One measure of performance is the long-term compound return divided by the maximum drawdown. So people like Pabrai, Whitman, Greenblatt etc are having serious problems because their max drawdowns here are huge. It raises serious questions about the viability of value investing if you have to periodicallly lose 35-45%+ of capital. On a personal note, it is gratifying to see that I've been shorting some of the same stocks that these investment legends have been buying. From a competitive point of view, it's nice to be up significantly for the first half, whilst these guys are getting taken out and shot during the same period. Don't let anyone tell you that you can't outperform the best investors in the world.
Simplistic analysis. The value investing view is don't bet on the macro-economy, as a whole. Don't try and time the market. They feel that the long-run return from value investing is sufficiently high that it is worth taking occasional huge hits during a bear market, in order to crank out superior returns in the long-term. They also feel that it is too difficult to time the market - both exit, and re-entry. You are more likely to sell too soon (like you did in early 2006) and miss gains, and then buy back either too soon or too late, again suffering underperformance. To time both exit AND re-entry well is incredibly hard. So they have a point - if they don't feel they can do it, then it's legitimate to avoid trying, and just concentrate on what they can do well, which is value stocks (usually). Bear in mind, from 2000-2003 there were even bigger warning signs, yet value stocks performed very well in that period, and many value investors on the list put out excellent returns. That's just one example. 1998, 1994, 1990 are others - selling out was on balance not a great idea. The one thing that puzzles me here is why did they buy the stocks that went down so much? There were many stocks and sectors that performed well in 2008 - energy, agriculture, mining. It does seem bizarre to have bought stocks like financials, real estate, retailers and airlines, during an obvious meltdown in the real estate and credit-driven sectors, when there was a rampaging bull market in the other sectors. I feel that these guys fell into a value trap. They valued stocks on normal earnings & book value, when the existence of a bubble meant that earnings and book value would plummet. They were IMO investing using a rear-view mirror instead of looking out the windscreen at the road ahead.
Excellent Commentary, Cutten .......................................................................................... It's useful for most investors and traders to see the downside of value investing - utter catastrophe during a genuine bear market. Even Buffett got totally creamed in the 1973-74 bear. Ben Graham was ruined in 1929-32. This is why trading/speculating is superior to investing IMO. The funniest thing is what will happen if the bear gets really serious e.g. S&P 1000. A lot of these guys will be down 50%+. I have to say as well, that many on this list demonstrate an utterly appalling disregard for risk control. To be down 30%+ in a year is shocking. One measure of performance is the long-term compound return divided by the maximum drawdown. So people like Pabrai, Whitman, Greenblatt etc are having serious problems because their max drawdowns here are huge. It raises serious questions about the viability of value investing if you have to periodicallly lose 35-45%+ of capital. ..................................................................................................... I love this !!!!!!!! Now all that needs to happen is for some successful traders to get on Bloomberg, CNN, CNBC and say.... Of course , day trading is the only way one can hope to consistently get stellar returns. As you know, even Buffet cannot make it in a bear market. But unfortunately, most folks cannot wait around 10 years for an "if come" result. Why just look at those retirees who rode the Buffett wave up, only to ride it down at 65 with no place to go. Whereas if one has buying power of $1,000,000 and knows how to day trade, one escapes the problems of long term investing such as Buffet is incurring. What the US really needs is less legal largesse in its stock markets with more favorable trading/margin rules . And what would be even better is to facilitate a low cost worldwide 24/7 open stock exchange that would represent the better companies from all countries in the world, thus creating enough potential such that even more day traders like myself can prosper. What the US citizenry needs to do is to call their congressmen right away to take out all the stops regarding daytrading and to demand cheaper more efficient trading venues.