Whitney Tilson email to investors presented without comment
After I sent out my last email, Yahoo was kind enough to send me a transcript of and links to my question and Buffett and Munger’s answers at the Berkshire meeting as well as my interview after the meeting (see attached and these links: https://finance.yahoo.com/video/buffett-free-trade-210441699.html and https://finance.yahoo.com/video/whitney-tilsons-berkshires-annual-meeting-220842901.html).
Value Partners Asia ex-Japan Equity Fund has delivered a 60.7% return since its inception three years ago. In comparison, the MSCI All Counties Asia (ex-Japan) index has returned just 34% over the same period. The fund, which targets what it calls the best-in-class companies in "growth-like" areas of the market, such as information technology and Read More
2) Random factoid of the day: five stocks account for 37% of the S&P 500’s gains this year (and 10 account for 46%):
3) I’ve been getting murdered on the short side in the past couple of weeks (another sign of the top?), but it could be worse – at least I’m out of LL, W and EXAS and, thankfully, never got into STRP, a case study that truly underscores the perils of shorting: it had a 50 PERCENT (!) short interest before going up FIVE TIMES in the last few weeks:
AT&T is undoubtedly disappointed that it's losing out on these assets, but there is one camp taking it much harder and that's investors who were short Straight Path's stock. More than 50 percent of the company's float -- shares available for trading -- were sold short in April before AT&T announced its offer, according to financial analytics firm S3 Partners. It said on May 9 that short-sellers were down about $480 million this year, for a 321 percent loss on an average short position of $150 million. Again, Straight Path itself was valued at just $450 million before it was put in play.
4) Speaking of investing perils, John Hempton has some wise thoughts on averaging down:
Warren Buffett is famously fond of "averaging down". If you liked it at $10 you should love it at $6. If it goes down "just buy more". And in the value investing canon you will not find that much objection to that view.
But averaging down has been the destroyer of many a value investor. Indeed averaging down is the iconic way in which value investors destroy themselves (and their clients).
After all if you loved something at $40 and you were wrong, you might love it more at $25 and you almost as likely to be wrong, and like it more still at $12 and could equally be wrong.
And before you know it you have doubled down three times, turning a 7 percent position into a 18 percent loss.
Do that on a few stocks and you can be down 50 percent. And in a bad market that 50 percent can be 80 percent.
5) And on the same topic, here’s Jason Zweig with some wise cautionary words regarding quantitative investing:
The very act of identifying a source of extra return in the financial markets can often end up reducing or erasing it. When massive computing power and the promise of precision lure billions, or hundreds of billions, of dollars into a mathematical investing strategy, that paradox can unfold faster and go farther than it would by human action alone. Success carries the seeds of its own failure. No wonder Mr. Bookstaber writes, “If you can model it, you’re wrong.”
His message isn’t entirely pessimistic.
Novel “agent-based modeling” techniques that learn how individuals and groups interact in real time show promise, he argues — although he says development is roughly at the stage weather forecasting was at in, say, the 1950s.
You can apply Mr. Bookstaber’s warnings in a couple of ways.
First, be wary of investing in mathematical approaches that are coupled with floods of new money chasing recent performance. Sooner or later, the influx of capital will drive up prices to unsustainable levels — at which point a selling panic may ensue. The recent popularity of so-called minimum-volatility funds could turn out to be one such case.
You can also recognize that, during market crises, investors who were naively eager to buy become desperately anxious to sell.
Having the cash and courage to buy from them at bargain prices is a good way to raise your future returns. Not joining them as blind-faith buyers in the first place is an excellent way to reduce your risk, now and in the future.
6) A fascinating article:
Decades of research in cognitive psychology show that the human mind struggles to understand nonlinear relationships. Our brain wants to make simple straight lines. In many situations, that kind of thinking serves us well: If you can store 50 books on a shelf, you can store 100 books if you add another shelf, and 150 books if you add yet another. Similarly, if the price of coffee is $2, you can buy five coffees with $10, 10 coffees with $20, and 15 coffees with $30.
But in business there are many highly nonlinear relationships, and we need to recognize when they’re in play. This is true for generalists and specialists alike, because even experts who are aware of nonlinearity in their fields can fail to take it into account and default instead to relying on their gut. But when people do that, they often end up making poor decisions.
The article concludes with this test (answers at the end) (I missed one):
Test Your Nonlinear Aptitude
Take this quiz to see if you can make the best decisions.
1) In which scenario do you consume more pizza?
A. You eat one 12-inch pizza.
B. You eat two 8-inch pizzas.
2) Firms are often advised to focus on customers with the highest lifetime value. Suppose your analysts segmented your customer base by deciles for lifetime value (where decile 1 is the most valuable). Which two segments’ values are likely to be closest?
A. Deciles 1 and 2.
B. Deciles 3 and 8.
3) Your company has two factories. Assuming that the factories operate 24/7, what would give you the largest increase in the number of products made per year?
A. Increase the productivity of the first factory from 100 to 120 products per hour.
B. Increase the productivity of the second factory from 130 to 140 products per hour.
4) You’re trying to learn how willing men and women are to pay for a new product. So far, you’ve surveyed 20 men and 50 women. Which option would increase the precision of your estimates the most?
A. Survey five more women and 30 more men.
B. Survey 100 more women and five more men.
5) Which of these two business travelers increases the time spent in the air more?
A. The first traveler increases miles flown from 20,000 to 40,000 a year.
B. The second traveler increases miles flown from 50,000 to 60,000 a year
6) Suppose your primary goal is to increase traffic to your company’s website. Which of the following should you do?
A. Increase your organic search ranking for a keyword from 10th to fourth.
B. Increase your organic search ranking for a keyword from fourth to second
Straight Path Shorts Learned Not to Bet Against Wireless: Gadfly