Choose Your Hathaway: Berkshire or Anne

We’ve always admired Berkshire Hathaway Chairman Warren Buffett. He is, after all, the most successful investor in history and a legend in his own time. Mr. Buffett’s annual reports are fountains of investment wisdom that should be required reading in business schools and for everyone in the money management profession.

We’ve also had an admiration for the Hollywood actress Anne Hathaway for many years, though we know nothing of her investment acumen. Male readers of the Sizemore Investment Letter might be interested to know that the 28-year-old Ms. Hathaway will be starring in next year’s Batman movie, The Dark Knight Rises, as the Catwoman. Berkshire Hathaway shareholders had better hope that her performance generates its share of press. Their investment returns might depend on it.

Yes, dear readers, you read that correctly. As ridiculous as it might sound, the price of Berkshire Hathaway’s shares (NYSE: BRK-B)  move in tandem with Ms. Hathway’s film career. Consider what the Financial Times had to say on the matter:

Anne Hathaway is young, beautiful and excels in soppy romantic comedies. But while her puppy-dog-eyes bring tears to multiplexes worldwide, her performances are now being watched in a less familiar quarter: Wall Street. Traders barely noticed that the star of The Devil Wears Prada had hosted last month’s Oscars, until blogger Dan Mirvish spotted an odd pattern: if Ms Hathaway is in the news, Warren Buffett’s Berkshire Hathaway stock jumps too.

Berkshire shares rose 2.02% the night before Ms. Hathaway hosted the Oscars,and a whopping 2.94% the day after. The opening day of her 2009 comedy Bride Wars was also a good day for Berkshire stock—up 2.60%.

And why might Anne Hathaway be having this effect on Berkshire Hathaway’s price? Mirvish suggests that “robotraders” are scanning the headlines looking for trends, and upon seeing multiple mentions of “Hathaway,” are automatically buying Berkshire Hathaway stock. Given that algorithmic trading now accounts for 70% of all trading, it’s not implausible.

Sadly, this is what the investment management profession has degenerated into.

Real “roll up your sleeves” research is too much work. Who has time to read the notes to a balance sheet, after all?  Even technical analysis, which has always had its share of the mentally lazy who prefer cheap shortcuts they rarely understand, is now too much work. Yes, instead we now have computers reading the newspapers for us and buying Berkshire Hathaway stock every time Anne Hathaway gets photographed by the paparazzi. Brilliant.

The bad news is that this kind of nonsensical noise trading adds to the volatility of the markets. Remember last year’s “Flash Crash” in which the Dow dropped 1,000 points for no discernable reason only to gain most of it back almost instantly? Though there has yet to be a satisfactory answer as to what happened that day, most blame the crash on algorithmic trading run amok. The timing of the Flash Crash, just a year after the worst bear market in a generation, added to the sense of alienation that many retail investors feel towards Wall Street. The man on the street can be forgiven for concluding that it is a rigged game.

The truth is, Wall Street really is a rigged game and it always has been. And even with the massive regulatory apparatus ostensibly put in place to protect the “little guy,” the reality is that Wall Street will most likely always be a rigged game.

The good news is that it really doesn’t matter. Level-headed investors can still do quite well, so long as they play to their strengths. Remember, robotraders have time horizons measured in seconds. You can’t compete with that if you are attempting to trade on speed.  But if you choose your investments well—like Mr. Buffett—you can do very well with time horizons measured in months, years, or even decades.

Those investors willing and able to make bold bets against the herd can also do quite well.  Again returning to Buffett, “You have to be fearful when others are greedy and greedy when others are fearful.”

Or as Baron Rothschild more bluntly put it, “The time to buy is when there is blood in the streets.”

Investors who were able to buy during the pits of the Flash Crash made a fortune in a matter of minutes.  Those who bought during the post-Lehman meltdown of late 2008 had to wait a bit longer but still enjoyed fantastic returns in the two years that followed.
In The Sizemore Investment Letter, this is how we approach investing.  We focus on themes with staying power—demographic trends, the rise of the emerging market middle class, and long-term dividend growth, to name a few. We look for opportunities where a given stock—or the stock market as a whole—have been mispriced due to investor fear, greed or lack of understanding.  And then we invest accordingly.

And as for the lovely Ms. Hathaway, we enjoy our starlets on the silver screen, but we don’t let them affect our investment decisions.

Good investing,

Charles Lewis Sizemore, CFA

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This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities.