WSJ: Stock Picking Is Dying Because There Are No More Stocks to Pick

Head over to the Wall Street Journal for an article by Jason Zweig on the shrinking number of listed equities. This development may be related to the struggles of active managers to compete with passive index strategies.

 

"For stock pickers, differentiating among the remaining choices is “an even harder game”
than it was when the market consisted of twice as many companies, says Michael
Mauboussin, an investment strategist at Credit Suisse in New York who wrote a report
this spring titled “The Incredible Shrinking Universe of Stocks.”


That’s because the surviving companies tend to be “fewer, bigger, older, more profitable
and easier to analyze,” he says — making stock picking much more competitive."

Stock Picking Is Dying Because There Are No More Stocks to Pick

Morgan Housel on Bubbles: The Reasonable Formation of Unreasonable Things

Take a look at this excellent paper on market bubbles by Morgan Housel of the Collaborative Fund. You can download the nine page pdf on their website (link below).

 

• Bubbles are not anomalies or mistakes. They are an unavoidable feature of markets where investors with different goals compete on the same field. They would occur even if everyone was a financial saint.

• Bubbles have less to do with rising valuations and more to do with shrinking time horizons among people playing a different game than you are.

• Protecting yourself as an investor is mostly a function of understanding and acting upon your own time horizon, accepting that other people’s goals are different than your own.

 

Morgan Housel on Bubbles: The Reasonable Formation of Unreasonable Things

 

Epsilon Theory: Tell My Horse

Ben Hunt is one of my favorite writers on the market narrative and the business of managing money. His latest Epsilon Theory post, Tell My Horse, perfectly captures the anxiety that is now pervasive in parts of the active investment community - under siege from passive and algorithmic strategies and a narrow market.

"So here’s my question. How do you survive, both physically and metaphysically, in a market you don’t trust but where you must act as if you do? How do you pass? How do you reconcile the actions and beliefs necessary to be successful in this market with the experiences and training of a lifetime that tell you NOT to act this way and believe in all this?"

"Here’s the human answer. You make accommodations. You surrender little by little to the new religion and its transactional catechism. It starts off easy enough. At first it’s just staying quiet while others talk. Then it’s simple superstitious behavior that you can laugh off. Who does it hurt to pour a shot of rum and leave it out on the table for Baron Samedi? Ha ha ha. But then a friend testifies to you in a private moment. You can see with your own eyes the earthly rewards his faith has brought, while your caution and doubt have brought you nothing but portfolio underperformance and difficult conversations with unhappy clients. And then one day you feel it. Yes, I, too, can purchase Big Data. I, too, can purchase Cloud Computing. I, too, can purchase an ETF Model. I don’t need ideas of my own. I can transact for whatever ineffable machines or models I require to succeed in this market of ineffable machines and models, so that I can tend to more important things like “building my business” or “interacting with clients.”"

"To hedge out our most pronounced career risk — which is not a large portfolio loss, because so many others will be in the same boat, but is rather a small portfolio loss from independent decision-making while others are making non-independent, collective gains. How do we accomplish this hedge? By eliminating independent risk-taking and embracing collective risk-taking, that’s how. By blindly serving the loas of the market — sometimes ancient ones like Value Investing but more frequently new ones like Modern Portfolio Theory or Passive Investing — and letting them ride us like a horse."

I cannot recommend his writings at Epsilon Theory enough.

Epsilon Theory: Tell My Horse

How Hertz Became the Perfect Contrarian Short in 2014

Head over to SumZero to hear the recap of the 2014 published short pitch of Hertz (HTZ) by Tom Fogarty.

"When I first started shorting Hertz, the consensus narrative was very persuasive—consolidation would lead to more pricing power, operational changes would improve profitability, and the spinoff of HERC [Hertz Equipment Rental Corp.] offered potential financial engineering and value-creating divestiture possibilities. I’d researched and passed on Hertz several times over the years, never quite sure whether it was actually profitable in an economic return sense. But I like a good consolidation story as much as the next guy, and the industry had consolidated from nine to four firms since I’d last analyzed it, so I thought it was worth a look as a long."

How Hertz Became the Perfect Contrarian Short in 2014

 

Not a recommendation to buy or sell securities. Not a recommendation or solicitation for any fund or partnership. Please read our Disclaimer!

 

Robots Are Eating Money Managers’ Lunch

Head over to Bloomberg for a profile of Orthogon Partners, a fund specialized in esoteric assets. As passive and algorithmic investing is increasing taking share from active, human management, Rishi Ganti is looking at obscure and complex assets to find value: 

esoteric assets—the most obscure stuff he can find. He’s arranged alternative funding for charter schools in the U.S. and paid cash upfront to collect judgments due at Brazil’s supreme court. His team also has purchased nonperforming loans at a discount in Portugal and partnered with local experts in Mexico to fund government infrastructure programs. It’s even provided interim financing for refugee camps in Italy. The point about these investments, he says, is that they require “high human capital” to manage, even if they’re plentiful. “It’s like dark matter,” Ganti says. “They dwarf the visible stuff lit up by markets.”

 

Robots Are Eating Money Managers’ Lunch

Sohn Conference Hong Kong Notes 2017

Head over to Marketfolly for notes on the 2017 Sohn Hong Kong conference

The pitches included Carson Block (Muddy Waters), Eashwar Krishnan (Tybourne Capital), Shashin Shah (Think Investments), James Tu (Nine Masts Capital), Seth Fischer (Oasis Management), and many others.

Sohn Conference Hong Kong Notes 2017

 

Not a recommendation to buy or sell securities. Not a recommendation or solicitation for any fund or partnership. Please read our Disclaimer!

The Future of Active Management: David Hunt, Ron O'Hanley, and Joel Greenblatt

Bloomberg had a panel on the future of active asset management at Bloomberg Invest New York.

The panelists were PGIM President and CEO David Hunt, State Street Global Advisors President and CEO Ron O'Hanley, and Gotham Asset Management Co-Chief Investment Officer Joel Greenblatt

The Future of Active Management: David Hunt, Ron O'Hanley, and Joel Greenblatt

 

Why Bruce Berkowitz Still Likes Stocks Others Hate

Bloomberg has a 44 minute interview with Bruce Berkowitz, famous value investor and founder and Chief Investment Officer of Fairholme Capital. 

Given his underperformance in the past years, and the underperformance of value in general, a very important conversation.

Why Bruce Berkowitz Still Likes Stocks Others Hate

 

Not a recommendation to buy or sell securities. Not a recommendation or solicitation for any fund or partnership. Please read our Disclaimer!

 

Goldman Sachs Mulls the Death of Value Investing

Goldman Sachs recently published a report on the continued underperformance of the "value factor" as pioneered by Eugene Fama and Kenneth French.

 

Goldman Sachs Mulls the Death of Value Investing

“The fundamental backdrop for value returns has been especially unfriendly in recent years, but these conditions are unlikely to persist (and are already moderating),” a Goldman Sachs team led by equity strategist Ben Snider, wrote late yesterday in note to clients. “Nonetheless, the maturity of the current economic cycle suggests value returns will remain subdued in the near term.”

You can also find more charts at Valuewalk: Goldman Sachs: Value Investing Is Dead

Andrew Left: The Bounty Hunter of Wall Street

Head over to the New York Times for a profile of famous short seller Andrew Left of Citron Research.

Andrew Left: The Bounty Hunter of Wall Street

In the finance world, Left, 46, is what is known as an “activist” short-seller. After he places a bet against the price of a stock, he then publishes research designed to torpedo the company’s value, often by airing accusations of fraud or abuse. This is entirely legal, as long as what he publishes is not itself fraudulent. Left takes short positions in companies across a whole range of industries — Tesla, Valeant, GoPro — and though he makes mistakes, he has an unusually high success rate.

 

Not a recommendation to buy or sell securities. Not a recommendation or solicitation for any fund or partnership. Please read our Disclaimer!

PIMCO: A Less ‘Impulsive’ China: Bracing for Lower Growth

Gene Frieda, global strategist for PIMCO out of London, wrote this in May about the slowing credit impulse in China's economy:

"Nonetheless, the complacency over China’s potential deceleration, combined with the greater likelihood that strong U.S. confidence indicators will now move more in line with the lackluster real economy data, suggest that some of the froth will come out of the most growth-oriented segments of the global markets."

PIMCO: A Less ‘Impulsive’ China: Bracing for Lower Growth

“credit impulse,” the change in the growth rate of aggregate credit to GDP

China's credit impulse has clearly been slowing:

The global credit impulse has also slowed down sharply:

Morgan Housel: The Seduction of Pessimism

Interesting blog post by Morgan Housel on why we may pay more attention (or lend more credibility to) pessimistic narratives:

Morgan Housel: The Seduction of Pessimism

"Hearing that the world is going to hell is more interesting than forecasting that things will gradually get better over time, even if the latter is accurate for most people most of the time. Pessimism can be hard to distinguish from critical thinking and is often taken more seriously than optimism, which can be hard to distinguish from salesmanship and aloofness."

Daniel Kahneman once wrote: “Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce.”

"Anything competitive – markets, businesses, countries, careers – moves toward improvement by breaking down what isn’t working and exposing weaknesses. Which means improvement over the long term has to be interrupted by short-term adversity".