“When”-ing Isn’t Everything, It’s The Only Thing! by Dave Iben, Kopernik Global Investors
“I’ll take Investment Analysis for $2000, Alex.”
“The Answer is, ‘The most important word in analysis’.”
Michael Burry likes water, is he onto something?
When the film adaptation of Michael Lewis’ book The Big Short was released last year, it caused a stir. At the end of the movie, it is revealed that one of the film's heroes, Dr. Michael Burry the first institutional investors to discover the problems with and bet against the US subprime market, has now Read More
“I’ll go with ‘What is Why’?”
“I’m sorry, our panel of contemporaries believe the correct response is, ‘What is When?’”
“Winning isn’t everything, it’s the only thing”, is a quote made famous by Vince Lombardi, but is believed to have originated with UCLA football coach Red Sanders in 1950. Interestingly, late in life, Lombardi lamented having ever said it because it was misconstrued to place winning above morals. This commentary will address the currently inflated perception of the importance of ‘when’, the current opportunity to ‘win’, the prevalence of people playing not to lose, and some thoughts on how the game is being played, including the moral imperative to put the needs of clients ahead of career considerations. We’ll conclude with why now is likely to be a good time to invest in undervalued stocks. Well-known game shows will serve as a useful medium.
I keep six honest serving-men
(They taught me all I knew);
Their names are What and Why and When
And How and Where and Who.
— Rudyard Kipling
We’ve always found the six questioning words referenced above to be very important. Asking questions is the best way to learn. Answering what, when, where, who, why, and how is the best way to form a logical conclusion and to build a case for that conclusion. While the first four of these questions are useful, the last two – why and how – are arguably most important. They are active words, requiring thought and analysis. Rote facts will not suffice. While this commentary will, as usual, focus on the why and how of Kopernik’s investment strategy, it will spend an undue amount of time on the question of when. This is because it is a question that has been asked in most client meetings over the past year. In preview, relevant historical happenings will be illustrated and the important question of the timing of future activities will be addressed. However, rather than providing ‘timing’ answers, the importance of the word ‘when’ will be called into question.
Now, we know that when people ask “when?” they aren’t really asking when. We’re aware that they are not truly suggesting that, given a choice between a ‘5-bagger’ or earning zero in a money fund, timing is of that much importance. They are likely recognizing that, in the real world, clients don’t always have enough patience; that their business may suffer if things play out in slow motion; that doing the right thing can have adverse career implications in the current, attention-deficit world. Maybe the Go-Go’s were writing to their Financial Advisor when they penned their early hit song “How Much More”:
“How much more can I take
Before I go crazy, oh yeah
Crazy, oh yeah
How much more heartache
Before I go crazy, oh yeah”
It’s been heartache for value investors. Certainly, I found myself humming those lyrics in January. To risk being redundant (yet again!) on this important topic – when is a perfectly good question for assessing career risk, but for analyzing investment risk and prospects – Why and How are much more effective questions. “Why might ‘xyz corp.’ be a good investment” and “how much is the upside potential” generate much more useful knowledge than do “when is it going to work (which tends to be unknowable anyhow) or everyone’s favorite version, “what is the catalyst.” As Yogi Berra, among others, said: “Predictions are difficult, especially about the future.”
Focusing on the question of when – the when on many people’s mind is when will a bear market start (or has one started), and when will value investing in general and Kopernik’s style specifically, return to favor? Starting with the first question, our view is that we are clearly in a bear market. The fervor for popular “quality growth” stocks over the past half-dozen years has camouflaged the existence of a stealth, but severe, bear market. The good news, as discussed in our recent Commentary (The Big Long), is that this is not the beginning of a bear market, but the latter stages of a long, deep, bear market that has been sowing the seeds of the best bargains in a generation.
What is a ‘Bear Market’?
A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment to be self-sustaining. As investors anticipate losses in a bear market and selling continues, pessimism only grows. Although figures can vary, for many, a downturn of 20% or more in multiple broad market indexes, such as the Dow Jones Industrial Average (DJIA) or Standard & Poor’s 500 Index (S&P 500), over at least a two-month period, is considered an entry into a bear market.
The ‘silver lining’ embedded in long, deep, bear markets is that they can create tremendous potential for investors, as the excesses of the previous bull market are rectified and generally swing too far. The result is often unparalleled money-making opportunities.
To return to the question of ‘when,’ and to persuade that a superior question is ‘how much,’ let’s segue to another game show, “Let’s Make a Deal.”
“Let’s Make a Deal is a television game show which originated in the United States in 1963 and has since been produced in many countries throughout the world. The program was created and produced by Stefan Hatos and Monty Hall, the latter serving as its host for many years.
The format of Let’s Make a Deal involves selected members of the studio audience, referred to as “traders,” making deals with the host. In most cases, a trader will be offered something of value and given a choice of whether to keep it or exchange it for a different item. The program’s defining game mechanism is that the other item is hidden from the trader until that choice is made. The trader thus does not know if he is getting something of greater value or a prize that is referred to as a “zonk,” an item purposely chosen to be of little or no value to the trader.” — Wikipedia
The current marketplace can be considered akin to playing let’s make a deal. In the TV game, something of value can be dealt for an unknown, behind a curtain or a door. On Wall Street, something of value – cash – can be exchanged for a business that inherently is valuable. The significant difference from the TV version is that on TV they don’t know what they are trading for (hidden behind a curtain) or how much it’s worth, but they know when they’ll receive it (immediately), whereas in real life the business one purchases are known and its value can be reasonably appraised, but when the market will get around to reflecting that value is not known. Adding spice to the equation, the question of how fast the world’s central banks will deliver on their promises to erode the value of the cash one would be left holding, should they decide to forego an opportunity to make an exchange, is likewise unknown. Fortunately, for investors, central bank error has inadvertently caused many of the stocks, currently available for deal-making, to be more inexpensive than usual. The allegorical ‘2016 special airing’ of “Let’s Make a Deal – Wall Street Edition” offers many great franchises for a pittance.
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