2008... Oh, What A Year... First Ever Turtle Awards
For the first time ever, I would like to present my newly conceived Turtle Awards for the best and the worst of the year. For some of these picks, the actions/words/etc may have occurred in prior years but the outcome had to be in 2008. The awards are simplistic; the nominations are biased towards the jury members' interests and knowledge; the voting jury consists of a single lone individual. And, oh yeah, there is no monetary compensation; if anything, these guys should be paying a poor guy like me. Don't send me any hate mail because your favourite didn't make the list or ended up with the wrong award ;) (However, don't hesitate to send me love mail if you are female and under the age of 30 ;)
[very long post]
2008 Turtle Awards
Super Duper Management Turtle (aka Best Executive, Director, or Policymaker)
1st: Prem Watsa and his team (Fairfax Financial)
2nd: Brian Goldner and the rest of management (Hasbro)
3rd: Ben Bernanke (Federal Reserve)
(Special Mention: Jamie Dimon (JP Morgan))
Top pick is Prem Watsa of Canadian insurer Fairfax Financial for turning around the company. After a few troubled years in the mid-2000's, he managed to rescue the company due to some timely and bearish contrarian bets on credit. This is a good example of how management makes or breaks an investment.
My second pick is sort of wild. I chose Brian Goldner and his management team at Hasbro. I don't follow Hasbro so I'm uncertain of how responsible management was to its stock performance. Hasbro is one of the top performers in the S&P 500 in 2008 (up around 14%.) There are other stocks that have gone up a lot more but a lot of that has to do with macro trends. For instance, Wal-mart has done extremely well but I can't really credit management for the stock performance (this is similar to how I wouldn't credit ExxonMobil's management for the stock performance in the last decade.) Hasbro operates in a tough retail environment, with competition from other toymakers, video games, and even established companies like Disney. Toys are largely discretionary (but less so than cars and clothes) so this a tougher business than it seems.
It's popular to bash Ben Bernanke but I haven't given up faith and think he is handling the situation well so far. He is the right person for the job right now. (I just wish he would try to liquidate or nationalize the institutions the FedRes is bailing out, along with providing more transparency on who is milking the taxpayers. I am definitely not a fan of creating superbanks that are run by the same incompetent leaders that got us into this mess, while rewarding the shareholders who profitted before and picked those leaders to run these firms.) Bernanke made a major contrarian call that everyone is ignoring. He, similar to my view early in the year, felt that inflation was a lagging indicator and wasn't something to worry about. Recall that commodity prices were skyrocketing at this time. He turned out to be right. In lesser hands, the central bank may had done something disastrous at that time, such as significantly boosting interest rates or sharply contracting the money supply.
Although some (the loose money crowd) have been critical of him for not expanding the money supply, I think he was ingenious in buying assets while selling Treasuries. Selling Treasuries is unusual but this move prevents inflation (since you aren't really increasing the money supply.) Increasing the money supply is easier now but it was quite risky a few months ago when commodities were still strong and speculators were ready to crush the US$, so that's a bold move by Bernanke.
A special mention goes to Jamie Dimon of JP Morgan & Chase. JP Morgan, under the stewardship of Jamie Dimon seems to have avoided most of the serious problems related to mortgages, bad bets on commodities, or dealings with dubious entities in the shadow banking system. He also bought out Bear Stearns, which was a very risky move. The stock market certainly thinks the company is doing well. However, I am extremely cautious on JP Morgan due to its massive derivatives exposure (I haven't checked lately but historically it was the #1 bank with derivatives exposure.) I think these financial behemoths are at the point where no one, including management and regulators, have any idea what is going on within the firms. If JP Morgan collapses due to a derivatives blow-up, Jamie Dimon would be partly responsible. If it weren't for the derivatives exposure, I would put him near the top of the list, certainly above the Hasbro management.
Turtle With High Salary, Little Work To Show (aka Worst Executive, Director, or Policymaker)
1st: AIG management team
2nd: Geir Haarde (Iceland Prime Minister)
3rd: Fred Goodwin (Royal Bank of Scotland chairperson) and rest of the directors and management
Many would put Dick Fuld (Lehman CEO) at the top but I actually think he tried his best to salvage the best from horrible mistakes in the past (albeit the past mistakes were by him.) Ok, call my sympathetic to him. There is no shortage of candidates for this category.
I'm picking the entire AIG management team, particularly the several CEOs they had, along with all their risk officers, and the board of directors (asleep while drawing high salaries again?) I think some of the blame also goes to Greenberg, the prior CEO, who took AIG into the risky bond insurance (but he also lost almost his entire net worth, most of it in AIG.) It's amazing to think what just happened with AIG. Here we have the largest insurance company in the world with seemigly super-safe balance sheet totally disintegrating. I remember, just before investing in Ambac, thinking that AIG would be a lower-risk bet but, boy, was I wrong. If it weren't for the sympathy of the US government, and hence American taxpayers, AIG would be liquidated or nationalized by now.
The problems started late 2007 and early 2008 when external accountants cited material weakness in AIG's financial statements. Management kept saying it was a minor issue and even did some remarkable things, including one that would go down as possibly the worst move of the year: AIG raised capital at costly terms but also chose to increase its dividends. Talk about trying to satisfy the clueless passive dividend investors while destroying the company (as a side note, you'll note that the same lunacy is occuring in other financial companies many of whom are still paying high dividends while issuing shares on highly dilutive terms or issuing debt to government at somewhat high rates. The executives and board of directors are clearly thinking that the loss of the passive dividend investors, who generally screen by criteria such as 'companies that have raised dividends for 20 years' or 'companies that have not cut dividends for 10 years,' are worth placating at the expense of irrational financial policy.)
AIG management had been trying to raise capital and kept saying they only needed a few billion, which later turned into $15 billion. But, in the end, AIG needed more than $150 billion and it's still not clear what is going on at AIG, or who actually runs the company these days. What brought down AIG is the same stuff that has killed the monoline bond insurers (insurance on mortgage bonds) but, unlike most tainted monolines, AIG had to post collateral (this is similar to the bond insurer SCA, which went bankrupt almost instantly in 2007 because it couldn't post collateral.)
Second one is a story that occurs frequently, unfortunately, in undeveloped or developing countries, but it's rare to see in a developed country. I have to say the prime minister of Iceland, Geir Haarde, who is loved in the same manner as George Bush is in America, basically destroyed the country. It is not entirely his fault, for many of the other elected officials and central bankers, not to mention the private bankers, played big roles. Nevertheless, the PM has the ultimate say in matters and he clearly failed. This is an example of extreme free-market ideology led to the collapse of the country. The government had pursued extreme free-market policies, including de-regulation and little oversight, likely in the hope that the market corrects problems and prevents any serious issues. Obviously, like the extreme free-market proponents elsewhere, no one realized how greedy the bankers and bank investors would be in Iceland. Leverage is the drug for the free market and it's easy to get hooked on it.
For some reason RBS (Royal Bank of Scotland) doesn't get the scrutiny of others such as Citigroup or UBS. Some might say Citigroup or UBS is far worse but I have to go with RBS management, particularly the chairperson, and directors, as perhaps some of the most incompetent bunch around. I'm not too familiar with banking or follow it closely but my impression was that RBS was conservatively run. I hadn't thought that they would be as wild as the cowboys running most of the major American banks. Yet we had one of the top banks in the world implode.
Improving The Dismal Science Award (aka Best Investment-related Economist)
1st: Nouriel Roubini
2nd: Robert Shiller
3rd: Paul Krugman
(Special mention: Stephen Roach)
Note that this award is limited to economists that impact investments. A huge chunk of economics, particularly areas related to microeconomics, human behaviour, or some theoretical areas, and do not have noticeable impact on investing. For instance, some of the most innovative research, at least according to me, is being conducted into pricing pollution properly and to mitigate it. This issue will have huge ramifications in the long run but has no impact on inveting in the short or intermediate terms. So, my picks will be skewed towards macroeconomics, and in areas that impact the investing world.
First place goes to Nouriel Roubini. Some would accuse him of being extreme with his calls but he has been correct for the most part. He made some correct calls, extreme at that time, regarding housing and the financial system in general. I recall reading some of his views but thought they were too extreme and seemed simplistic. I particularly remember his estimate of losses of around $1.5 trillion and thought it was crazy. It turned out that I was wrong and I paid a heavy price. I am still not a fan of Roubini but he deserves respect for not only getting it right, but also taking big reputational risk by making seemingly wild estimates that turned out to be true.
Robert Shiller has been bearish on housing for, what seems like, almost a decade. One can accuse him of being wrong and too early but he became the expert on housing. His work on housing price indexes and various other measures have become influential. He is also playing a role in shaping US government fiscal policy. Now that the monetary policy is almost useless, investors will likely start paying a lot of attention to fiscal policy of the government.
Who knows if Paul Krugman's theories are any good but, in my books, his liberal views more than makes up for it :) Anyway, he won the unofficial Nobel Prize in Economics in 2008. He played an instrumental role in shaping, or mostly rejecting, the original TARP plan, among others. Now that the Republicans are basically run out of town, he will likely have a major impact on Democrats' policies. He isn't in the inner circle of the Obama administration--he doesn't agree with Obama on many issues--but liberals look up to him. Krugman is one of the few Keynesians of influence left in America and it seems that the US government will pursue Keynesian policies for the next half decade or more. It's somewhat ironic that monetarists fall out of favour almost the year after Milton Friedman passes away.
I don't know if Krugman has moved away from trade issues but I would like him to provide his views to the masses--that would be me :)--regarding the situation in Asia. Krugman made his name in the late 90's for his explanations of the collapse of the Asian Tigers. I would like to see him provide further commentary on the Asian situation, particularly the manufacturing overcapacity situation in China. China is the story of 2009 and perhaps the most important macro issue right now is the collapse in world trade and exporting nations. IANAE but my impression is that this should be Krugman's bread & butter so more thoughts on this, rather than beating the housing issue to death would be appreciated.
I have to give a shout out to Stephen Roach, former global economist at Morgan Stanley. Many will accuse him of being a broken clock that ended up being right. He was very bearish for a long time (as far back as 2005.) I personally respect someone for their correctness in the details rather than timing. Yes, timing is absolutely critical for investments but, by knowing the details, you also avoid mistakes. Stephen Roach was correct on some key issues. Roach shaped my thoughts a few years ago, especially his comments about the trade imbalance and the inability of the US-China relationship to be sustained for very long. He was the primary, but not the only, reason I became bearish on commodities and China, and never even believed the decoupling theory for one second.
Bears Win (aka Best Bearish Call)
1st: Jeremy Grantham (bearish on stocks and real estate)
2nd: William Ackman (monoline bond insurers)
3rd: Prem Watsa (credit)
This list, like many others, contains people I follow or encounter. There are many, especially in the shadow banking system (i.e. hedge funds, shadow part of investment banking, etc), who are probably even better but I don't know anything about them.
Easy for Jeremy Grantham to make the top spot last year. After all, he is considered a perma-bear and they tend to be right eventually. What's different about Grantham is that he was very accurate. His call back almost a decade ago for the broad market to return close to 0% seemed ludicrous back then but it actually happened. Your annualized returns from 1998 to now is very close to zero--an unthinkable scenario even in 2007. His best call is his superbearish views of the real estate bubbles in USA and Britain. There were many who were bearish on real estate, including me, but provided very little evidence or never had strong conviction. In contrast, Grantham is very factual, with a historical focus, and pretty much nailed it. I dismissed Grantham a few years ago as being too extreme but I was wrong.
(Looking forward, one of the major calls by Grantham is that corporate profits as a share of the economy will decline (but he is somewhat bullish and starting to advocate going long.) One of his famous sayings, at least in my mind, is when he says that if corporate profits don't mean-revert, capitalism is broken! Next time you invest in commodity businesses posting super-high returns, or technology stocks increasing profits at 20%+, keep this in mind. Individual companies can keep profits high for a long time but industry as a whole can't.)
I have been critical of William Ackman and took an opposite position from him, but I have to give credit where it's due. Although the final chapter is not written yet, his bearish call on monoline bond insurers has been correct. I still think he showboats a bit too much but that's his style. In the vein of Carl Icahn or Jim Rogers, he tends to be aggressive and has a good handle of public relations. I'm not sure why he didn't see the blow-up in credit if he anticipated the collapse of the monolines. For instance, I'm not sure why he went long Sears or Target, or even Borders, if he was calling for an implosion of the bond insurers. In any case, congratulations to him for his contrarian bet on the monolines (especially two or three years ago.) As much as I criticize him at times, corporate America--and Canada!--needs activist investors like him. He may not be my cup of tea but if he keeps this up, he'll become very successful like Carl Icahn.
I'm still not clear on Prem Watsa's investing skill. Nevertheless, his bearish bet on credit (it was really a 2007 bet but he maintained similar stance in 2008) was totally contrarian and deserves credit. Prem Watsa is a bottom-up deep-value investor so it's interesting to see him make a major macro call, which would have been considered speculative at that time.
Bulls Win (aka Best Bullish Call)
1st: Jim Rogers (Japanese Yen)
2nd: Goldbugs long bullion and not mining stocks (gold)
3rd: Marc Faber (US$)
Jim Rogers was bullish on the Yen early in the year, at a time when no one thought the Yen carry-trade would unwind any time soon. I was also bullish on Yen for the last two years but never capitalized on it fully.
At second place comes the goldbugs. But you had to be a special type of goldbug. You had to be long bullion but not long the gold mining stocks. If you were long gold bullion, you owned one of the best performing assets of the year (it's actually one of the best performing assets of the last 5 years.) However, if you were long gold mining stocks or other precious metals like silver or platinum, the story was different. You got absolutely crushed--even worse than the broad market if you owned the mining stocks. Anyway, I'm turning bearish on gold--perhaps a bit too early--so I have a bad feeling about gold in the future.
Marc Faber often makes vague predictions and hedges his bets often but he had a spectacular bullish call on US$. It was totally contrarian. He remarked how the US$ can rally because it was oversold and out of favour everywhere. Faber was somewhat bullish on the US$ in late 2007 but was only proven right last year. He also warned early last year about getting out of commodities.
Pigs Lose (aka Worst Investment Call)
1st: Boone Pickens (Oil over $150, will not fall below $100)
2nd: Russian oligarchs (Superbullish leveraged commodity bets)
3rd: Jim Rogers (Bearish on US$)
Hard to narrow down the list. Some that didn't make the list include Edward Lampert adding to Citigroup; Bill Miller buying Freddie Mac and Lehman Brothers; Carl Icahn buying Yahoo!; anyone investing in Madoff's funds; and so on.
The top "award" goes to Boone Pickens for his disastrous call on oil. He said oil will go over $150 and will not fall below $100. His fund, which is a concentrated energy fund, is basically toast. In addition, he was building the largest wind farm in the US and I'm not sure if that has been shelved or not. (Pickens also had a disastrous, albeit smaller, bet on the Yahoo! takeover and sold out with a loss. I never understood what an oilman was doing with Yahoo! but more bizarre things have happened last year ;) )
It's time we shed some tears for those who made the second spot. Or, once you figure out their net worth, maybe not. One may call it brashness--or perhaps foolishness--but whatever it was, we have a whole bunch of wealthy individuals who leveraged themselves heavily on a view that commodity prices would stay high. The most prominent amongst them are, of course, the Russian oligarchs, who collectively lost hundreads of billions and have more than $75 billion of debt coming due. The strategy here involved taking on massive leverage with the assumption of ever-rising commodity prices in order to take over the world (or something like that ;) ). The oligarchs will still remain super-wealthy and life will be ok. However they have lost their power and freedom now that the Russian government, which always plays hardball, is bailing them out. Needless to say, the oligarch era is over in Russia. Some thought the strong-arm of the government would bring them down but it was the free market that brought them down for their greed in the end... joining the oligarchs are several Canadian and Americans with Aubrey McClendon, CEO of Chesapeake Energy, being one of the visible ones to have lost a massive fortune due to a margin call on his highly leveraged portfolio.
At 3rd, we have Jim Rogers' disastrous bearish bet on US$. Rogers isn't a good market timer and doesn't generally provide specifics. He had been getting out of the US$ for years but if anyone followed his strategy last year, you would have made one of the worst calls last year (at the macro level.) The US$ rallied sharply against almost every currency out there (except the Yen of course.) You would have posted anywhere from 10% to 40% loss on the currency bet alone. Maybe the US$ will collapse next year and become worthless but US$ bears paid a severe price last year. (for what it's worth, I'm mostly bullish on the US$, and am even thinking of shorting gold--the ultimate bullish bet on US$.)
Evil Turtle of the Year (aka We Definitely Need
Less People Like This Award)
1st: Bernard Madoff
2nd: Accountants drunk on mark-to-market Kool-Aid
3rd: Christopher Cox
A highly opininated pick.
First place goes to Bernard Madoff, the hedge fund manager and highly respected executive and director. Up to $50 billion has been lost ($30 billion in losses have supposedly been accounted for by Bloomberg.) Fortunately, nearly all investors were institutional investors or wealthy investors so it's won't be as painful for the average citizen as the Enron or Worldcom collapse.
I'm not a fan of fair value accounting. I think my side won the war but it's pointless to argue now. It's sort of like arguing that the bogus Iraq was wrong but it doesn't do much anymore since the culprits and warmongers have got whatever they wanted. Accountants should have been careful with marking assets to market not just now but in the past as well. It's too late to change anything without disrupting the market and introducting further confusion. I just hope that they don't blindly follow the efficicent market view and at least consider the possibility of irrational prices for during stressful periods. Those in power will not admit to their mistakes in order to save face (similar to how the Bush administration, especially superhawks such as Richard Perle, Paul Wolfowitz and Dick Cheney will never admit that Iraq doesn't have WMD) but I'm hopeful that a new generation of accountants will dump the past thinking.
Christopher Cox of the SEC clearly didn't know what he was doing last year. This is what happens when you have someone who is in favour of full de-regulation trying to manage a crisis caused by lax enforcement of rules. On top of keeping an eye off the de-regulation train run amok over the years, he made some crazy decisions last year, including the infamous short selling ban on financial stocks. I am totally in favour of banning naked shorting (it's actually illegal but the SEC doesn't enforce it for small companies.) But trying to ban short selling for select sectors is nothing more than the lame strategy of waving hands in the air hoping that something good will happen. The Obama administration needs someone a bit more competent to run the SEC. The market won't like such a pick (market never likes regulation or enforcement of rules) but it's the right thing to do.
Turtle That Learned To Fly (aka Best up-and-coming Investor)
1st: William Ackman
2nd: Mike Shedlock of Mish's Global Economic Trend Analysis Blog
3rd: Porche management team
William Ackman made his name last year. The bet against the monoline bond insurers was brave and he was creating a lot of enemies on the Street. Although his monoline short is actually a 2007 story, it continued to be a major call with big repercussions to the market. At one point, there was some concern that some of the banks were going to collapse if the monolines fell. The market was sort of right while being wrong in some sense. It was wrong because the monolines weren't really at the point of collapse in the sense of missing payments or principal. But the collapse would certainly have produced a systematic shock. This is the main reason reason AIG, whose problems are all related to bond insurance, was bailed out. If AIG failed, some conspiracy theorists claim that Goldman Sachs, which was a big buyer of insurance from AIG, would have gone down as well (I can't vouch for the accuracy of this theory.)
However, Ackman moved into retailers and consumer discretionary companies way too early. His investments in Sears, Target, and Borders, were terrible in terms of timing. But since he runs a hedge fund, I have no idea if he hedged any of the stock losses using derivatives. Overall, Bloomberg reports that his main fund returned a negative 12% last year--terrible by hedge fund standards. Ackman uses derivatives, such as options or credit default swaps, to boost his returns so I view this -12% as being inferior to a mutual fund manager or a typical small investor with the same return.
Anyway, William Ackman will be an interesting investor to watch over the years. He's not my style but others may find him interesting.
No one probably heard of Mike Shedlock and he isn't famous and (probably) isn't a millionaire like others that are mentioned in this post but he was pretty accurate on certain things. He is a bearish blogger and an investment advisor who was quite accurate with his deflation call. He wasn't perfect and was wrong on several things but he was one of the few that I encountered who maintained their deflation stance. This was far more difficult than it seems because commodities had a massive run-up last year and the consensus was clearly calling for high inflation. Many economists were also saying that the FedRes and other central banks were behind the curve and had negative real rates but all that turned out to be wrong. Anyway, good job by Mike and he was definitely one of the rising stars last year. It remains to be seen if he can keep it up.
High risk strategy by Porche management to attack the short-sellers of Voltswagen shares takes the 3rd place. The result was the largest short-covering rally in history. It supposedly caused massive losses at several European investment banks, as well as losses for short-seller David Einhorn of Greenlight, and German billionaire Adolf Merckle, who committed suicide partly due to this disastrous bet. Let's just hope that Porche didn't use too much debt to pursue this strategy. If Porche actually had an interest in owning Voltswagen then things will be fine; but if this was some get-rich-quick scheme, Porche may be stuck with a company they have little interest in, while needing to pay off their borrowings.
(This example also illustrates the risk to arbitrageurs of the possibility of an irrational thing occurring. Almost every fundamental analyst would have said that Voltswagen was wildly overvalued. But a strategic buyer, Porche, was willing to pay up and the possibility of a corner by Porche wasn't anticipated by the short-sellers.)
Turtle With Best Flying Skills (aka Best Investor)
1st: John Paulson (Paulson & Co hedge fund)
2nd: Jeremy Grantham (GMO)
3rd: Prem Watsa (Fairfax Financial)
For those not familiar, John Paulson runs a bunch of hedge funds and was one of the most successful investors shorting real estate over the years. He is famous for shorting real estate in 2007, and had supposedly started buying real estate in 2008. He runs various funds but one of his fund actually posted 589% return in 2007 (obviously through derivatives.) Bloomberg reports that one of his main funds returned 37% in 2008, an amazing return. I don't have access to hedge funds and have no idea how much of this is due to leverage so I would consider this far inferior to a mutual fund manager with similar returns. In any case, he is one of the best investors presently.
Jeremy Grantham makes asset allocation recommendations so it's hard to compare him to stockpickers. In any case, his macro calls are finally starting to be respected, by me and others. I remember dismissing him a few years ago because his views were so off-the-wall but now I have changed my opinion of him. He has been recommending his GMO fund managers to start going long. He says that, although there is a risk of the market overshooting to the downside, someone not buying at low valuations is not just foolish but they are indeed a fool.
Prem Watsa continues his strong record from 2007, with bearish stance on the economy and the markets in general. He has made some big deep-value investments in distressed companies (newspapers, forestry stocks, media companies, insurance companies) and it remains to be seen how these work out. A lot of these look like value traps to me. Although, it should be noted that he often invests in bonds or convertible bonds so the risk is lower than if you went and bought shares.
Worst Crash-landing By A Turtle (aka Worst Investor)
1st: Boone Pickens
2nd: Bill Miller
3rd: Eric Sprott
(Special Mention: Edward Lampert)
Thankfully jury members are excluded from the nomination so I don't make the list :) But we had enough of a selection last year. I am ignoring fraudulent investment results, such as anyone embroiled in the Madoff scheme, because the goal here is to recognize actual investment strategies and tactics. There are investors far worse than those that I picked; I picked these guys because they are prominent and influential. One should also keep in mind that, although some people performed terribly last year, they made a huge fortune in the past. So this award is not indicative of long-term performance.
First place goes to Boone Pickens, who picked up an award above, is, for those not familiar, an oil&gas speculator who supposedly has made fortunes several times, and lost them several times too. He might be on his way to losing another fortune the way things unfolded in the oil & gas industry.
At second place, we have Bill Miller, who is the highly respected value manager that oversees the Legg Mason mutual funds (particularly the Value Trust and Opportunity Trust mutual funds.) Bill Miller is a contrarian who is also generally a concentrated investor. Unlike many others running big funds, his strategy is to swing for the fences. Unfortunately, 2008 was a total disaster with his bullish bets on distressed financial firms such as Bear Stearns, Freddie Mac, and Countrywide ending up in disaster (he may have broken even on Countrywide, because he averaged down when it collapsed below the BAC buyout price, but it was a bad investment.) He made one of the worst calls of the year when he speculated that the collapse of Bear Stearns was the bottom. Well, instead of Bear Stearns signalling the worst, it ended up being the canary in the coal mine. The death of the canary was actually a signal of more deaths to come.
Eric Sprott is arguably the top hedge fund manager in Canada. His hedge funds did well but his mutual funds were a total disaster. He is a superbull on commodities and gold so it's not surprising to see him crash in the latter part of last year. His company also went public near the peak of the commodity bubble and his stock is off significantly. Anyone investing in Sprott probably wishes they never heard of the notion of a commodity supercycle.
Edward Lampert gets the special citation of an unwanted type. Lampert, a hedge fund manager who runs Sears among other companies, is having a rough time. On top of Sears doing poorly--most of it due to macro issues outside his control--his investment in Citigroup and a few others have done very poorly. I also don't understand his strategy of using high leverage for his auto retailer, and continuously buying back shares of Sears. Both these strategies seem akin to skating on thin ice. Holding cash is not a bad thing when the macro picture looks bleak.
Chapter In A Turtle's Life Award (aka Most Significant Investment-Related Event)
1st: Bankruptcy of Lehman Brothers
2nd: Rise & fall of oil
3rd: US government seizes Fannie Mae and Freddie Mac from shareholders
The 'liquidationists' and extreme libertarians got their wish when the government let Lehman Brothers fail. Credit market essentially locked up when that happened (bond investors of all stripes became extremely risk averse because they were finally facing the potential for losses--until then nearly all losses had accrued to equity investors.) I personally would not have let Lehman fail but would have probably nationalized it or liquidated it (this is typically the "liberal" solution.) But I don't think there was a "correct" action that could have been taken. I don't think the failure was as big of a mistake as some on the left, who generally want to bail out all industries, or some industry insiders, who generally don't want to see any financial institution fail, have claimed. Someone had to lose one way or another (because Lehman seems to have owned bad/worthless assets): either Lehman shareholders and bondholders, along with the general bond investors who have been underpricing risk for a long time; or taxpayers and society, who would have had to save the bondholders (this latter scenario is what is happening with AIG, where huge sums are being transferred from taxpayers to bondholders and, to a minor degree, shareholders. If AIG wasn't bailed out, bondholders would pay the price, as with Lehman.)
Given everything that has happened, the oil story doesn't look big. But it is. West Texas Intermediate crude oil hit an all-time nominal high of $147 early in the year. This had huge implications for the world. Suddenly, oil importing nations ranging from USA to India to China were facing tighter finances and the threat of price inflation.
But then it collapsed into the $30's. This also had huge implications but opposite from that of the peak early in the year. Now, the suddenly cash-strapped consumers in USA or the cash-strapped governments in India got a huge boost. In USA alone, the collapse of oil saved consumers around $150 billion.
The significance of the rise and fall of oil is that we may have seen a long-term peak set in oil, similar to oil in 1980. If so, the oil bull market is over, although it is not out of the question for oil to rise and fall 30% to 50% every few years (especially every time some warmonger gets bloodthirsty :( .) I'm not entirely certain that we have seen the multi-decade peak but I am leaning towards that direction.
The 3rd place goes to the nationalization of Fannie Mae and Freddie Mac, the world's largest mortgage lending duo. I'm in the minority who believe that this was a huge mistake. If anything, the government should have let the GSEs post losses and then taken them over. By seizing them without any proof of insolvency, they basically signalled to the market that no one should invest in any financial institution. This largely ended the fresh capital investments that had been occuring until that point. Financial institutions had extreme difficulty repairing the balance sheets after this.
Turtles Like Reading Award (aka Best Book, Article, Essay, or Work)
1st: On a return to normalcy by Geoff Gannon (Gannon On Investing)
2nd: Bringing down Bear Stearns by Bryan Burrough (Aug 2008 Vanity Fair)
3rd: Is value dead? by Rob Carrick (May 22 2008 Globe Investor)
(Special Mention: Rising unemployment increases the pressure for misguided trade policies by Michael Pettis. November 20th, 2008 blog entry at China Financial Markets)
Selection here is totally biased since it depends on what I read or encountered last year. I am not a big reader and some readers of this blog may read a lot more than me (especially if they work in the industry.)
The key insight from Geoff Gannon, at least for me, is the notion that stocks are not inherently attractive. I never knew this until I came across this post (his core argument is explained in articles written several years ago but I only came across them recently.) Prior to reading his work, I always went with the mantra that stocks are almost always the #1 asset in the long run. Yes, you go into huge bear and bull markets but stocks always beat other assets (even during the Great Depression, if you dollar-cost-averaged, you would have beaten practically all other assets.) I thought this was because of some special characteristic of stocks (some call it equity risk premium; some refer to the ability of stocks to reinvest and compound at high rates without paying taxes; etc.) Gannon's view is quite radical for me and has completely changed my thinking. His view is that stocks have been attractive throughout most of the last 100 years because they often became cheap. So, there is no reason one should assume stocks are the way to go at any point in time. A lot of this is intuitive (after all, everyone is trying to buy when cheap and sell when overvalued) but Gannon sort of clarified my thinking.
The Bryan Burrough article about Bear Stearns is somewhat controversial. It provides a very pro-Bear-Stearns view and almost implicates Goldman Sachs as being part of the bear raid that brought down Bear Stearns (for what it's worth I suspect Goldman Sachs, which was superbullish on commodities, got beaten up badly when commodities collapsed in October.) I don't think we'll ever know what the reality of the situation was. Additional firms, including Lehman Brothers, Citigroup, Fannie Mae, and Freddie Mac, have faced a beating from shareholders and bondholders due to concern over bad mortgage assets on their books. Except for the fair value accountants who are certain that current distressed prices of mortgage assets reflect their true worth, no one can really prove anything. Does Citgroup actually have a balance sheet bad enough to explain the collapse in its market value? Who knows? Anyway, it's an interesting article from the inside.
In Is value dead? Rob Carrick profiles an obscure value investor from Canada by the name of Francis Chou. Value investors had been struggling, as early as April, and this article summarized the environment faced by Chou. It provides an inside look of a small value manager who started out with nothing and has been quite successful. If I ever become successful--probability of that is equivalent to aliens invading earth i.e. close to 0% ;)--I suspect it would be in the vein of Chou. People like Chou are more representative, in terms of portfolio size, obscurity, research budget, background, and insider access, than many other successful investors commonly mentioned. The latter are professional investors who cannot be easily emulated by amateur investors like me or, I suspect, most readers of this blog. For instance, there is no way I can dig through beaten-down mortgage backed securities and buy them as someone like Jim Grant has suggested, or as John Paulson does for a living. Similarly, no one can go and buy senior debt at very attractive terms as Prem Watsa does because (i) we don't have enough money and (ii) don't have access to special deals like that.
(Not related to the article but Chou said (in his letters) that he is starting to hedge the US$. This would have been a very poor move last year. I think hedging the currency makes sense if you are doing it to satisfy clients (i.e. if clients are concerned simply due to wildly fluctuating currencies.) But if you ignore client considerations, I personally don't think it is worth hedging currencies. My feeling is that currencies are part and parcel of an investment. It is better to invest with the currency in mind than to hedge it. Yes, currencies are one of the most difficult assets to predict but people forget that hedging is also an investment decision. There are numerous stories of many firms that lost huge sums from their US$ hedges. If you don't hedge, you can also get a better feel for how competitive a foreign business is relative to the world (i.e. businesses are not coasting off currency exchange gains.))
I think the following issue is so important that it's worth giving a special award for it. Michael Pettis wrote a blog entry, which seems innocuous but has radically changed my view of the world. If you are macro-oriented, like I am, global trade is likely to be the biggest issue for the next 2 or 3 years. In the blog entry, Michael Pettis refers to the possibility of China making serious mistakes. The insightful thing I gained from his writing is his comparison of modern day China to USA in the 1920's. Both countries were running big trade surpluses and had huge overcapacity in manufacturing (the market still hasn't priced in the overcapacity in Chinese manfuacturing in my opinion.) The gold standard that USA was running caused half the problems back then, with it sucking huge amounts of gold from the surplus deficit (i.e. consuming) countries, but even without the gold standard, China has been sucking up huge amounts of US dollars. Pettis was the first person I have encountered--do note that I'm not an expert and don't work in the field so there may be many others who originated this thought--who equates the Smoot-Hawley tariff to the devaluation of the currency (or purposely pegging the currency at a lower value) of modern day China. If China de-values its currency, a re-run of the 30's is not out of the question :( If you are macro-inclined, bookmark Pettis' blog and read it once in a while--it's more important than my blog.
If you read through all that, thanks and hope you enjoyed it... If you just skipped to the end, grr, all that work for nothing ;)
[very long post]
2008 Turtle Awards
Super Duper Management Turtle (aka Best Executive, Director, or Policymaker)
1st: Prem Watsa and his team (Fairfax Financial)
2nd: Brian Goldner and the rest of management (Hasbro)
3rd: Ben Bernanke (Federal Reserve)
(Special Mention: Jamie Dimon (JP Morgan))
Top pick is Prem Watsa of Canadian insurer Fairfax Financial for turning around the company. After a few troubled years in the mid-2000's, he managed to rescue the company due to some timely and bearish contrarian bets on credit. This is a good example of how management makes or breaks an investment.
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My second pick is sort of wild. I chose Brian Goldner and his management team at Hasbro. I don't follow Hasbro so I'm uncertain of how responsible management was to its stock performance. Hasbro is one of the top performers in the S&P 500 in 2008 (up around 14%.) There are other stocks that have gone up a lot more but a lot of that has to do with macro trends. For instance, Wal-mart has done extremely well but I can't really credit management for the stock performance (this is similar to how I wouldn't credit ExxonMobil's management for the stock performance in the last decade.) Hasbro operates in a tough retail environment, with competition from other toymakers, video games, and even established companies like Disney. Toys are largely discretionary (but less so than cars and clothes) so this a tougher business than it seems.
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It's popular to bash Ben Bernanke but I haven't given up faith and think he is handling the situation well so far. He is the right person for the job right now. (I just wish he would try to liquidate or nationalize the institutions the FedRes is bailing out, along with providing more transparency on who is milking the taxpayers. I am definitely not a fan of creating superbanks that are run by the same incompetent leaders that got us into this mess, while rewarding the shareholders who profitted before and picked those leaders to run these firms.) Bernanke made a major contrarian call that everyone is ignoring. He, similar to my view early in the year, felt that inflation was a lagging indicator and wasn't something to worry about. Recall that commodity prices were skyrocketing at this time. He turned out to be right. In lesser hands, the central bank may had done something disastrous at that time, such as significantly boosting interest rates or sharply contracting the money supply.
Although some (the loose money crowd) have been critical of him for not expanding the money supply, I think he was ingenious in buying assets while selling Treasuries. Selling Treasuries is unusual but this move prevents inflation (since you aren't really increasing the money supply.) Increasing the money supply is easier now but it was quite risky a few months ago when commodities were still strong and speculators were ready to crush the US$, so that's a bold move by Bernanke.
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A special mention goes to Jamie Dimon of JP Morgan & Chase. JP Morgan, under the stewardship of Jamie Dimon seems to have avoided most of the serious problems related to mortgages, bad bets on commodities, or dealings with dubious entities in the shadow banking system. He also bought out Bear Stearns, which was a very risky move. The stock market certainly thinks the company is doing well. However, I am extremely cautious on JP Morgan due to its massive derivatives exposure (I haven't checked lately but historically it was the #1 bank with derivatives exposure.) I think these financial behemoths are at the point where no one, including management and regulators, have any idea what is going on within the firms. If JP Morgan collapses due to a derivatives blow-up, Jamie Dimon would be partly responsible. If it weren't for the derivatives exposure, I would put him near the top of the list, certainly above the Hasbro management.
Turtle With High Salary, Little Work To Show (aka Worst Executive, Director, or Policymaker)
1st: AIG management team
2nd: Geir Haarde (Iceland Prime Minister)
3rd: Fred Goodwin (Royal Bank of Scotland chairperson) and rest of the directors and management
Many would put Dick Fuld (Lehman CEO) at the top but I actually think he tried his best to salvage the best from horrible mistakes in the past (albeit the past mistakes were by him.) Ok, call my sympathetic to him. There is no shortage of candidates for this category.
I'm picking the entire AIG management team, particularly the several CEOs they had, along with all their risk officers, and the board of directors (asleep while drawing high salaries again?) I think some of the blame also goes to Greenberg, the prior CEO, who took AIG into the risky bond insurance (but he also lost almost his entire net worth, most of it in AIG.) It's amazing to think what just happened with AIG. Here we have the largest insurance company in the world with seemigly super-safe balance sheet totally disintegrating. I remember, just before investing in Ambac, thinking that AIG would be a lower-risk bet but, boy, was I wrong. If it weren't for the sympathy of the US government, and hence American taxpayers, AIG would be liquidated or nationalized by now.
The problems started late 2007 and early 2008 when external accountants cited material weakness in AIG's financial statements. Management kept saying it was a minor issue and even did some remarkable things, including one that would go down as possibly the worst move of the year: AIG raised capital at costly terms but also chose to increase its dividends. Talk about trying to satisfy the clueless passive dividend investors while destroying the company (as a side note, you'll note that the same lunacy is occuring in other financial companies many of whom are still paying high dividends while issuing shares on highly dilutive terms or issuing debt to government at somewhat high rates. The executives and board of directors are clearly thinking that the loss of the passive dividend investors, who generally screen by criteria such as 'companies that have raised dividends for 20 years' or 'companies that have not cut dividends for 10 years,' are worth placating at the expense of irrational financial policy.)
AIG management had been trying to raise capital and kept saying they only needed a few billion, which later turned into $15 billion. But, in the end, AIG needed more than $150 billion and it's still not clear what is going on at AIG, or who actually runs the company these days. What brought down AIG is the same stuff that has killed the monoline bond insurers (insurance on mortgage bonds) but, unlike most tainted monolines, AIG had to post collateral (this is similar to the bond insurer SCA, which went bankrupt almost instantly in 2007 because it couldn't post collateral.)
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Second one is a story that occurs frequently, unfortunately, in undeveloped or developing countries, but it's rare to see in a developed country. I have to say the prime minister of Iceland, Geir Haarde, who is loved in the same manner as George Bush is in America, basically destroyed the country. It is not entirely his fault, for many of the other elected officials and central bankers, not to mention the private bankers, played big roles. Nevertheless, the PM has the ultimate say in matters and he clearly failed. This is an example of extreme free-market ideology led to the collapse of the country. The government had pursued extreme free-market policies, including de-regulation and little oversight, likely in the hope that the market corrects problems and prevents any serious issues. Obviously, like the extreme free-market proponents elsewhere, no one realized how greedy the bankers and bank investors would be in Iceland. Leverage is the drug for the free market and it's easy to get hooked on it.
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For some reason RBS (Royal Bank of Scotland) doesn't get the scrutiny of others such as Citigroup or UBS. Some might say Citigroup or UBS is far worse but I have to go with RBS management, particularly the chairperson, and directors, as perhaps some of the most incompetent bunch around. I'm not too familiar with banking or follow it closely but my impression was that RBS was conservatively run. I hadn't thought that they would be as wild as the cowboys running most of the major American banks. Yet we had one of the top banks in the world implode.
Improving The Dismal Science Award (aka Best Investment-related Economist)
1st: Nouriel Roubini
2nd: Robert Shiller
3rd: Paul Krugman
(Special mention: Stephen Roach)
Note that this award is limited to economists that impact investments. A huge chunk of economics, particularly areas related to microeconomics, human behaviour, or some theoretical areas, and do not have noticeable impact on investing. For instance, some of the most innovative research, at least according to me, is being conducted into pricing pollution properly and to mitigate it. This issue will have huge ramifications in the long run but has no impact on inveting in the short or intermediate terms. So, my picks will be skewed towards macroeconomics, and in areas that impact the investing world.
First place goes to Nouriel Roubini. Some would accuse him of being extreme with his calls but he has been correct for the most part. He made some correct calls, extreme at that time, regarding housing and the financial system in general. I recall reading some of his views but thought they were too extreme and seemed simplistic. I particularly remember his estimate of losses of around $1.5 trillion and thought it was crazy. It turned out that I was wrong and I paid a heavy price. I am still not a fan of Roubini but he deserves respect for not only getting it right, but also taking big reputational risk by making seemingly wild estimates that turned out to be true.
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Robert Shiller has been bearish on housing for, what seems like, almost a decade. One can accuse him of being wrong and too early but he became the expert on housing. His work on housing price indexes and various other measures have become influential. He is also playing a role in shaping US government fiscal policy. Now that the monetary policy is almost useless, investors will likely start paying a lot of attention to fiscal policy of the government.
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Who knows if Paul Krugman's theories are any good but, in my books, his liberal views more than makes up for it :) Anyway, he won the unofficial Nobel Prize in Economics in 2008. He played an instrumental role in shaping, or mostly rejecting, the original TARP plan, among others. Now that the Republicans are basically run out of town, he will likely have a major impact on Democrats' policies. He isn't in the inner circle of the Obama administration--he doesn't agree with Obama on many issues--but liberals look up to him. Krugman is one of the few Keynesians of influence left in America and it seems that the US government will pursue Keynesian policies for the next half decade or more. It's somewhat ironic that monetarists fall out of favour almost the year after Milton Friedman passes away.
I don't know if Krugman has moved away from trade issues but I would like him to provide his views to the masses--that would be me :)--regarding the situation in Asia. Krugman made his name in the late 90's for his explanations of the collapse of the Asian Tigers. I would like to see him provide further commentary on the Asian situation, particularly the manufacturing overcapacity situation in China. China is the story of 2009 and perhaps the most important macro issue right now is the collapse in world trade and exporting nations. IANAE but my impression is that this should be Krugman's bread & butter so more thoughts on this, rather than beating the housing issue to death would be appreciated.
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I have to give a shout out to Stephen Roach, former global economist at Morgan Stanley. Many will accuse him of being a broken clock that ended up being right. He was very bearish for a long time (as far back as 2005.) I personally respect someone for their correctness in the details rather than timing. Yes, timing is absolutely critical for investments but, by knowing the details, you also avoid mistakes. Stephen Roach was correct on some key issues. Roach shaped my thoughts a few years ago, especially his comments about the trade imbalance and the inability of the US-China relationship to be sustained for very long. He was the primary, but not the only, reason I became bearish on commodities and China, and never even believed the decoupling theory for one second.
Bears Win (aka Best Bearish Call)
1st: Jeremy Grantham (bearish on stocks and real estate)
2nd: William Ackman (monoline bond insurers)
3rd: Prem Watsa (credit)
This list, like many others, contains people I follow or encounter. There are many, especially in the shadow banking system (i.e. hedge funds, shadow part of investment banking, etc), who are probably even better but I don't know anything about them.
Easy for Jeremy Grantham to make the top spot last year. After all, he is considered a perma-bear and they tend to be right eventually. What's different about Grantham is that he was very accurate. His call back almost a decade ago for the broad market to return close to 0% seemed ludicrous back then but it actually happened. Your annualized returns from 1998 to now is very close to zero--an unthinkable scenario even in 2007. His best call is his superbearish views of the real estate bubbles in USA and Britain. There were many who were bearish on real estate, including me, but provided very little evidence or never had strong conviction. In contrast, Grantham is very factual, with a historical focus, and pretty much nailed it. I dismissed Grantham a few years ago as being too extreme but I was wrong.
(Looking forward, one of the major calls by Grantham is that corporate profits as a share of the economy will decline (but he is somewhat bullish and starting to advocate going long.) One of his famous sayings, at least in my mind, is when he says that if corporate profits don't mean-revert, capitalism is broken! Next time you invest in commodity businesses posting super-high returns, or technology stocks increasing profits at 20%+, keep this in mind. Individual companies can keep profits high for a long time but industry as a whole can't.)
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I have been critical of William Ackman and took an opposite position from him, but I have to give credit where it's due. Although the final chapter is not written yet, his bearish call on monoline bond insurers has been correct. I still think he showboats a bit too much but that's his style. In the vein of Carl Icahn or Jim Rogers, he tends to be aggressive and has a good handle of public relations. I'm not sure why he didn't see the blow-up in credit if he anticipated the collapse of the monolines. For instance, I'm not sure why he went long Sears or Target, or even Borders, if he was calling for an implosion of the bond insurers. In any case, congratulations to him for his contrarian bet on the monolines (especially two or three years ago.) As much as I criticize him at times, corporate America--and Canada!--needs activist investors like him. He may not be my cup of tea but if he keeps this up, he'll become very successful like Carl Icahn.
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I'm still not clear on Prem Watsa's investing skill. Nevertheless, his bearish bet on credit (it was really a 2007 bet but he maintained similar stance in 2008) was totally contrarian and deserves credit. Prem Watsa is a bottom-up deep-value investor so it's interesting to see him make a major macro call, which would have been considered speculative at that time.
Bulls Win (aka Best Bullish Call)
1st: Jim Rogers (Japanese Yen)
2nd: Goldbugs long bullion and not mining stocks (gold)
3rd: Marc Faber (US$)
Jim Rogers was bullish on the Yen early in the year, at a time when no one thought the Yen carry-trade would unwind any time soon. I was also bullish on Yen for the last two years but never capitalized on it fully.
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At second place comes the goldbugs. But you had to be a special type of goldbug. You had to be long bullion but not long the gold mining stocks. If you were long gold bullion, you owned one of the best performing assets of the year (it's actually one of the best performing assets of the last 5 years.) However, if you were long gold mining stocks or other precious metals like silver or platinum, the story was different. You got absolutely crushed--even worse than the broad market if you owned the mining stocks. Anyway, I'm turning bearish on gold--perhaps a bit too early--so I have a bad feeling about gold in the future.
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Marc Faber often makes vague predictions and hedges his bets often but he had a spectacular bullish call on US$. It was totally contrarian. He remarked how the US$ can rally because it was oversold and out of favour everywhere. Faber was somewhat bullish on the US$ in late 2007 but was only proven right last year. He also warned early last year about getting out of commodities.
Pigs Lose (aka Worst Investment Call)
1st: Boone Pickens (Oil over $150, will not fall below $100)
2nd: Russian oligarchs (Superbullish leveraged commodity bets)
3rd: Jim Rogers (Bearish on US$)
Hard to narrow down the list. Some that didn't make the list include Edward Lampert adding to Citigroup; Bill Miller buying Freddie Mac and Lehman Brothers; Carl Icahn buying Yahoo!; anyone investing in Madoff's funds; and so on.
The top "award" goes to Boone Pickens for his disastrous call on oil. He said oil will go over $150 and will not fall below $100. His fund, which is a concentrated energy fund, is basically toast. In addition, he was building the largest wind farm in the US and I'm not sure if that has been shelved or not. (Pickens also had a disastrous, albeit smaller, bet on the Yahoo! takeover and sold out with a loss. I never understood what an oilman was doing with Yahoo! but more bizarre things have happened last year ;) )
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It's time we shed some tears for those who made the second spot. Or, once you figure out their net worth, maybe not. One may call it brashness--or perhaps foolishness--but whatever it was, we have a whole bunch of wealthy individuals who leveraged themselves heavily on a view that commodity prices would stay high. The most prominent amongst them are, of course, the Russian oligarchs, who collectively lost hundreads of billions and have more than $75 billion of debt coming due. The strategy here involved taking on massive leverage with the assumption of ever-rising commodity prices in order to take over the world (or something like that ;) ). The oligarchs will still remain super-wealthy and life will be ok. However they have lost their power and freedom now that the Russian government, which always plays hardball, is bailing them out. Needless to say, the oligarch era is over in Russia. Some thought the strong-arm of the government would bring them down but it was the free market that brought them down for their greed in the end... joining the oligarchs are several Canadian and Americans with Aubrey McClendon, CEO of Chesapeake Energy, being one of the visible ones to have lost a massive fortune due to a margin call on his highly leveraged portfolio.
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At 3rd, we have Jim Rogers' disastrous bearish bet on US$. Rogers isn't a good market timer and doesn't generally provide specifics. He had been getting out of the US$ for years but if anyone followed his strategy last year, you would have made one of the worst calls last year (at the macro level.) The US$ rallied sharply against almost every currency out there (except the Yen of course.) You would have posted anywhere from 10% to 40% loss on the currency bet alone. Maybe the US$ will collapse next year and become worthless but US$ bears paid a severe price last year. (for what it's worth, I'm mostly bullish on the US$, and am even thinking of shorting gold--the ultimate bullish bet on US$.)
Evil Turtle of the Year (aka We Definitely Need
Less People Like This Award)
1st: Bernard Madoff
2nd: Accountants drunk on mark-to-market Kool-Aid
3rd: Christopher Cox
A highly opininated pick.
First place goes to Bernard Madoff, the hedge fund manager and highly respected executive and director. Up to $50 billion has been lost ($30 billion in losses have supposedly been accounted for by Bloomberg.) Fortunately, nearly all investors were institutional investors or wealthy investors so it's won't be as painful for the average citizen as the Enron or Worldcom collapse.
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I'm not a fan of fair value accounting. I think my side won the war but it's pointless to argue now. It's sort of like arguing that the bogus Iraq was wrong but it doesn't do much anymore since the culprits and warmongers have got whatever they wanted. Accountants should have been careful with marking assets to market not just now but in the past as well. It's too late to change anything without disrupting the market and introducting further confusion. I just hope that they don't blindly follow the efficicent market view and at least consider the possibility of irrational prices for during stressful periods. Those in power will not admit to their mistakes in order to save face (similar to how the Bush administration, especially superhawks such as Richard Perle, Paul Wolfowitz and Dick Cheney will never admit that Iraq doesn't have WMD) but I'm hopeful that a new generation of accountants will dump the past thinking.
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Christopher Cox of the SEC clearly didn't know what he was doing last year. This is what happens when you have someone who is in favour of full de-regulation trying to manage a crisis caused by lax enforcement of rules. On top of keeping an eye off the de-regulation train run amok over the years, he made some crazy decisions last year, including the infamous short selling ban on financial stocks. I am totally in favour of banning naked shorting (it's actually illegal but the SEC doesn't enforce it for small companies.) But trying to ban short selling for select sectors is nothing more than the lame strategy of waving hands in the air hoping that something good will happen. The Obama administration needs someone a bit more competent to run the SEC. The market won't like such a pick (market never likes regulation or enforcement of rules) but it's the right thing to do.
Turtle That Learned To Fly (aka Best up-and-coming Investor)
1st: William Ackman
2nd: Mike Shedlock of Mish's Global Economic Trend Analysis Blog
3rd: Porche management team
William Ackman made his name last year. The bet against the monoline bond insurers was brave and he was creating a lot of enemies on the Street. Although his monoline short is actually a 2007 story, it continued to be a major call with big repercussions to the market. At one point, there was some concern that some of the banks were going to collapse if the monolines fell. The market was sort of right while being wrong in some sense. It was wrong because the monolines weren't really at the point of collapse in the sense of missing payments or principal. But the collapse would certainly have produced a systematic shock. This is the main reason reason AIG, whose problems are all related to bond insurance, was bailed out. If AIG failed, some conspiracy theorists claim that Goldman Sachs, which was a big buyer of insurance from AIG, would have gone down as well (I can't vouch for the accuracy of this theory.)
However, Ackman moved into retailers and consumer discretionary companies way too early. His investments in Sears, Target, and Borders, were terrible in terms of timing. But since he runs a hedge fund, I have no idea if he hedged any of the stock losses using derivatives. Overall, Bloomberg reports that his main fund returned a negative 12% last year--terrible by hedge fund standards. Ackman uses derivatives, such as options or credit default swaps, to boost his returns so I view this -12% as being inferior to a mutual fund manager or a typical small investor with the same return.
Anyway, William Ackman will be an interesting investor to watch over the years. He's not my style but others may find him interesting.
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No one probably heard of Mike Shedlock and he isn't famous and (probably) isn't a millionaire like others that are mentioned in this post but he was pretty accurate on certain things. He is a bearish blogger and an investment advisor who was quite accurate with his deflation call. He wasn't perfect and was wrong on several things but he was one of the few that I encountered who maintained their deflation stance. This was far more difficult than it seems because commodities had a massive run-up last year and the consensus was clearly calling for high inflation. Many economists were also saying that the FedRes and other central banks were behind the curve and had negative real rates but all that turned out to be wrong. Anyway, good job by Mike and he was definitely one of the rising stars last year. It remains to be seen if he can keep it up.
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High risk strategy by Porche management to attack the short-sellers of Voltswagen shares takes the 3rd place. The result was the largest short-covering rally in history. It supposedly caused massive losses at several European investment banks, as well as losses for short-seller David Einhorn of Greenlight, and German billionaire Adolf Merckle, who committed suicide partly due to this disastrous bet. Let's just hope that Porche didn't use too much debt to pursue this strategy. If Porche actually had an interest in owning Voltswagen then things will be fine; but if this was some get-rich-quick scheme, Porche may be stuck with a company they have little interest in, while needing to pay off their borrowings.
(This example also illustrates the risk to arbitrageurs of the possibility of an irrational thing occurring. Almost every fundamental analyst would have said that Voltswagen was wildly overvalued. But a strategic buyer, Porche, was willing to pay up and the possibility of a corner by Porche wasn't anticipated by the short-sellers.)
Turtle With Best Flying Skills (aka Best Investor)
1st: John Paulson (Paulson & Co hedge fund)
2nd: Jeremy Grantham (GMO)
3rd: Prem Watsa (Fairfax Financial)
For those not familiar, John Paulson runs a bunch of hedge funds and was one of the most successful investors shorting real estate over the years. He is famous for shorting real estate in 2007, and had supposedly started buying real estate in 2008. He runs various funds but one of his fund actually posted 589% return in 2007 (obviously through derivatives.) Bloomberg reports that one of his main funds returned 37% in 2008, an amazing return. I don't have access to hedge funds and have no idea how much of this is due to leverage so I would consider this far inferior to a mutual fund manager with similar returns. In any case, he is one of the best investors presently.
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Jeremy Grantham makes asset allocation recommendations so it's hard to compare him to stockpickers. In any case, his macro calls are finally starting to be respected, by me and others. I remember dismissing him a few years ago because his views were so off-the-wall but now I have changed my opinion of him. He has been recommending his GMO fund managers to start going long. He says that, although there is a risk of the market overshooting to the downside, someone not buying at low valuations is not just foolish but they are indeed a fool.
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Prem Watsa continues his strong record from 2007, with bearish stance on the economy and the markets in general. He has made some big deep-value investments in distressed companies (newspapers, forestry stocks, media companies, insurance companies) and it remains to be seen how these work out. A lot of these look like value traps to me. Although, it should be noted that he often invests in bonds or convertible bonds so the risk is lower than if you went and bought shares.
Worst Crash-landing By A Turtle (aka Worst Investor)
1st: Boone Pickens
2nd: Bill Miller
3rd: Eric Sprott
(Special Mention: Edward Lampert)
Thankfully jury members are excluded from the nomination so I don't make the list :) But we had enough of a selection last year. I am ignoring fraudulent investment results, such as anyone embroiled in the Madoff scheme, because the goal here is to recognize actual investment strategies and tactics. There are investors far worse than those that I picked; I picked these guys because they are prominent and influential. One should also keep in mind that, although some people performed terribly last year, they made a huge fortune in the past. So this award is not indicative of long-term performance.
First place goes to Boone Pickens, who picked up an award above, is, for those not familiar, an oil&gas speculator who supposedly has made fortunes several times, and lost them several times too. He might be on his way to losing another fortune the way things unfolded in the oil & gas industry.
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At second place, we have Bill Miller, who is the highly respected value manager that oversees the Legg Mason mutual funds (particularly the Value Trust and Opportunity Trust mutual funds.) Bill Miller is a contrarian who is also generally a concentrated investor. Unlike many others running big funds, his strategy is to swing for the fences. Unfortunately, 2008 was a total disaster with his bullish bets on distressed financial firms such as Bear Stearns, Freddie Mac, and Countrywide ending up in disaster (he may have broken even on Countrywide, because he averaged down when it collapsed below the BAC buyout price, but it was a bad investment.) He made one of the worst calls of the year when he speculated that the collapse of Bear Stearns was the bottom. Well, instead of Bear Stearns signalling the worst, it ended up being the canary in the coal mine. The death of the canary was actually a signal of more deaths to come.
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Eric Sprott is arguably the top hedge fund manager in Canada. His hedge funds did well but his mutual funds were a total disaster. He is a superbull on commodities and gold so it's not surprising to see him crash in the latter part of last year. His company also went public near the peak of the commodity bubble and his stock is off significantly. Anyone investing in Sprott probably wishes they never heard of the notion of a commodity supercycle.
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Edward Lampert gets the special citation of an unwanted type. Lampert, a hedge fund manager who runs Sears among other companies, is having a rough time. On top of Sears doing poorly--most of it due to macro issues outside his control--his investment in Citigroup and a few others have done very poorly. I also don't understand his strategy of using high leverage for his auto retailer, and continuously buying back shares of Sears. Both these strategies seem akin to skating on thin ice. Holding cash is not a bad thing when the macro picture looks bleak.
Chapter In A Turtle's Life Award (aka Most Significant Investment-Related Event)
1st: Bankruptcy of Lehman Brothers
2nd: Rise & fall of oil
3rd: US government seizes Fannie Mae and Freddie Mac from shareholders
The 'liquidationists' and extreme libertarians got their wish when the government let Lehman Brothers fail. Credit market essentially locked up when that happened (bond investors of all stripes became extremely risk averse because they were finally facing the potential for losses--until then nearly all losses had accrued to equity investors.) I personally would not have let Lehman fail but would have probably nationalized it or liquidated it (this is typically the "liberal" solution.) But I don't think there was a "correct" action that could have been taken. I don't think the failure was as big of a mistake as some on the left, who generally want to bail out all industries, or some industry insiders, who generally don't want to see any financial institution fail, have claimed. Someone had to lose one way or another (because Lehman seems to have owned bad/worthless assets): either Lehman shareholders and bondholders, along with the general bond investors who have been underpricing risk for a long time; or taxpayers and society, who would have had to save the bondholders (this latter scenario is what is happening with AIG, where huge sums are being transferred from taxpayers to bondholders and, to a minor degree, shareholders. If AIG wasn't bailed out, bondholders would pay the price, as with Lehman.)
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Given everything that has happened, the oil story doesn't look big. But it is. West Texas Intermediate crude oil hit an all-time nominal high of $147 early in the year. This had huge implications for the world. Suddenly, oil importing nations ranging from USA to India to China were facing tighter finances and the threat of price inflation.
But then it collapsed into the $30's. This also had huge implications but opposite from that of the peak early in the year. Now, the suddenly cash-strapped consumers in USA or the cash-strapped governments in India got a huge boost. In USA alone, the collapse of oil saved consumers around $150 billion.
The significance of the rise and fall of oil is that we may have seen a long-term peak set in oil, similar to oil in 1980. If so, the oil bull market is over, although it is not out of the question for oil to rise and fall 30% to 50% every few years (especially every time some warmonger gets bloodthirsty :( .) I'm not entirely certain that we have seen the multi-decade peak but I am leaning towards that direction.
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The 3rd place goes to the nationalization of Fannie Mae and Freddie Mac, the world's largest mortgage lending duo. I'm in the minority who believe that this was a huge mistake. If anything, the government should have let the GSEs post losses and then taken them over. By seizing them without any proof of insolvency, they basically signalled to the market that no one should invest in any financial institution. This largely ended the fresh capital investments that had been occuring until that point. Financial institutions had extreme difficulty repairing the balance sheets after this.
Turtles Like Reading Award (aka Best Book, Article, Essay, or Work)
1st: On a return to normalcy by Geoff Gannon (Gannon On Investing)
2nd: Bringing down Bear Stearns by Bryan Burrough (Aug 2008 Vanity Fair)
3rd: Is value dead? by Rob Carrick (May 22 2008 Globe Investor)
(Special Mention: Rising unemployment increases the pressure for misguided trade policies by Michael Pettis. November 20th, 2008 blog entry at China Financial Markets)
Selection here is totally biased since it depends on what I read or encountered last year. I am not a big reader and some readers of this blog may read a lot more than me (especially if they work in the industry.)
The key insight from Geoff Gannon, at least for me, is the notion that stocks are not inherently attractive. I never knew this until I came across this post (his core argument is explained in articles written several years ago but I only came across them recently.) Prior to reading his work, I always went with the mantra that stocks are almost always the #1 asset in the long run. Yes, you go into huge bear and bull markets but stocks always beat other assets (even during the Great Depression, if you dollar-cost-averaged, you would have beaten practically all other assets.) I thought this was because of some special characteristic of stocks (some call it equity risk premium; some refer to the ability of stocks to reinvest and compound at high rates without paying taxes; etc.) Gannon's view is quite radical for me and has completely changed my thinking. His view is that stocks have been attractive throughout most of the last 100 years because they often became cheap. So, there is no reason one should assume stocks are the way to go at any point in time. A lot of this is intuitive (after all, everyone is trying to buy when cheap and sell when overvalued) but Gannon sort of clarified my thinking.
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The Bryan Burrough article about Bear Stearns is somewhat controversial. It provides a very pro-Bear-Stearns view and almost implicates Goldman Sachs as being part of the bear raid that brought down Bear Stearns (for what it's worth I suspect Goldman Sachs, which was superbullish on commodities, got beaten up badly when commodities collapsed in October.) I don't think we'll ever know what the reality of the situation was. Additional firms, including Lehman Brothers, Citigroup, Fannie Mae, and Freddie Mac, have faced a beating from shareholders and bondholders due to concern over bad mortgage assets on their books. Except for the fair value accountants who are certain that current distressed prices of mortgage assets reflect their true worth, no one can really prove anything. Does Citgroup actually have a balance sheet bad enough to explain the collapse in its market value? Who knows? Anyway, it's an interesting article from the inside.
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In Is value dead? Rob Carrick profiles an obscure value investor from Canada by the name of Francis Chou. Value investors had been struggling, as early as April, and this article summarized the environment faced by Chou. It provides an inside look of a small value manager who started out with nothing and has been quite successful. If I ever become successful--probability of that is equivalent to aliens invading earth i.e. close to 0% ;)--I suspect it would be in the vein of Chou. People like Chou are more representative, in terms of portfolio size, obscurity, research budget, background, and insider access, than many other successful investors commonly mentioned. The latter are professional investors who cannot be easily emulated by amateur investors like me or, I suspect, most readers of this blog. For instance, there is no way I can dig through beaten-down mortgage backed securities and buy them as someone like Jim Grant has suggested, or as John Paulson does for a living. Similarly, no one can go and buy senior debt at very attractive terms as Prem Watsa does because (i) we don't have enough money and (ii) don't have access to special deals like that.
(Not related to the article but Chou said (in his letters) that he is starting to hedge the US$. This would have been a very poor move last year. I think hedging the currency makes sense if you are doing it to satisfy clients (i.e. if clients are concerned simply due to wildly fluctuating currencies.) But if you ignore client considerations, I personally don't think it is worth hedging currencies. My feeling is that currencies are part and parcel of an investment. It is better to invest with the currency in mind than to hedge it. Yes, currencies are one of the most difficult assets to predict but people forget that hedging is also an investment decision. There are numerous stories of many firms that lost huge sums from their US$ hedges. If you don't hedge, you can also get a better feel for how competitive a foreign business is relative to the world (i.e. businesses are not coasting off currency exchange gains.))
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I think the following issue is so important that it's worth giving a special award for it. Michael Pettis wrote a blog entry, which seems innocuous but has radically changed my view of the world. If you are macro-oriented, like I am, global trade is likely to be the biggest issue for the next 2 or 3 years. In the blog entry, Michael Pettis refers to the possibility of China making serious mistakes. The insightful thing I gained from his writing is his comparison of modern day China to USA in the 1920's. Both countries were running big trade surpluses and had huge overcapacity in manufacturing (the market still hasn't priced in the overcapacity in Chinese manfuacturing in my opinion.) The gold standard that USA was running caused half the problems back then, with it sucking huge amounts of gold from the surplus deficit (i.e. consuming) countries, but even without the gold standard, China has been sucking up huge amounts of US dollars. Pettis was the first person I have encountered--do note that I'm not an expert and don't work in the field so there may be many others who originated this thought--who equates the Smoot-Hawley tariff to the devaluation of the currency (or purposely pegging the currency at a lower value) of modern day China. If China de-values its currency, a re-run of the 30's is not out of the question :( If you are macro-inclined, bookmark Pettis' blog and read it once in a while--it's more important than my blog.
If you read through all that, thanks and hope you enjoyed it... If you just skipped to the end, grr, all that work for nothing ;)
Loooong post indeed, but a good one.
ReplyDeleteI am not happy with this "nationalise the banks" meme that is gaing ground. A major part of the problem s lack of confidence and trust and nationalisations, with expropriation of existing investors, will destroy what remains of that faster then enything else. That will cause bankstocks to spiral down, making creditors lose confidence and forcing further nationalisations. Once you start nationalising banks I suspect you will not be able to stop before nationalising them all.
And what the hell is the exit strategy going to be? Sell them back to the public in a few years? And why would anybody buy if their newly bought assets are perceived to be highly likely to be nationalised?
Keep the banks nationalised? Yeah, that will be great. Banks are infamous for lousy cutomer service as is. Just wait until their staff become civil servants. and if you thought lending underwriting was poor the last few years, you haven't seen lending based on political priorities yet.
Great post!
ReplyDelete