It’s been the worst start to a New Year in my memory and even though I try to block out market noise, this roar could not be ignored. Yesterday I tracked down Bill Wilby, a Great Investor who left Wall Street in 2007 because it was getting “too crazy” in the markets and on the Street. He certainly got that right! Bill Wilby used to run the Oppenheimer Global Fund which was the number one performer in its category for the 12 years he managed it. He now runs money privately.
Here’s Bill Wilby’s take on the markets’ decline:
- Markets were looking for an excuse to fall apart and need a good, healthy “whack” for this market cycle to last.
- Feels like Asian contagion of 1997- similar roots- massive overbuilding in Asia, excessive bank lending, people stopped investing in China, massive capital outflows there. It spread to Russia and other emerging markets. Oil fell below $30.
- Difference then was the US was a big importer of oil, so its decline was like a big tax cut for US economy.
- Wilby predicts 1/3rd of US shale oil companies will go bankrupt and high yield defaults will rise.
- In 1998 S&P fell 19%, just missing bear market.
- Bill Wilby‘s operating thesis now is that market will fall 20-25%. We are well over half way there so it’s “a little late to sell.”
- He does not see excesses in market that would signal we had a market top.
- He will be looking to buy when market declines 20%.
- He is “extremely overweight” the US, which he describes as being in the catbird’s seat because of its economic and market flexibility.
- However he sees problems ahead for Private Equity, which has taken over the banking role as corporate lender, but with enormous leverage. He would not be surprised to see a big PE firm “hit the skids.”
- He is avoiding emerging markets, describing them as “in trouble.”
I thank Bill Wilby for taking the time to share his observations with us while he was on the road.
Michael Mauboussin: Here’s what active managers can do
This week we are interviewing an under the radar, value investor who, with few exceptions sticks to his fully invested, stock picking discipline no matter what the market weather.
As a long-time financial journalist I have seen investment theories and strategies come and go. Wall Street firms have devoted billions in their quest to find proprietary magic formulas for outperformance.
Michael Lewis’ best-selling book, now a movie, “The Big Short” did a masterful job of describing various mathematical and computer science algorithms that contributed to the financial crisis. They were so complex and arcane that even their creators and certainly their customers had little idea of what was in them and how they would really work in the real world.
This week’s guest has a much simpler approach which much to his surprise when he first tried it 17 years ago does work, but it comes with a large caveat: it is not appropriate in the vast majority of portfolios. He only applies some of it himself. He is John Dorfman, Chairman of Dorfman Value Investments, an investment management firm he founded in 1999 that manages money in separate accounts for high net worth individuals, family offices and a few institutions.
He is a deep value investor who runs concentrated stock portfolios that have outperformed the S&P 500 by a wide margin over the years. Dorfman is also a journalist. I knew him at The Wall Street Journal and even though he switched to money management full time in 1997 he still writes financial columns.
One of his most popular, which has been his first column of the year for the last 17 years, is devoted to his robot portfolio. Dorfman created his 10 stock robot portfolio to test the theory that statistically cheap stocks will outperform the market over time – and lo and behold they have.
He starts with all U.S. stocks with a market value of $500 million or more. Then he eliminates those with debt greater than equity then he picks the ten stocks selling for the lowest price earnings multiples of the past year’s earnings.
The result is the “Robot Portfolio” has had a compound average annual return, with dividends included, of nearly 16%, compared to just over 4% for the S&P 500.
Given the spectacular performance of his robot portfolio why doesn’t Dorfman just use that method for all of his accounts? He will tell us.
To watch the show on Public Television this weekend check your local listings here. Otherwise, it will be available on our website over the weekend. You will also find a link to Dorfman’s 2016’s Robot Portfolio on our website after the show airs.
Have a great weekend and make the week ahead a profitable and productive one.