The late Sir John Templeton once commented that “the four most expensive words in the English language are ‘this time it’s different.’”
No truer words have ever been spoken.
It’s true for degenerate gamblers, drug addicts and serial womanizers. It’s true for politicians peddling failed policy ideas. And it’s true for ne’er-do-well employees or business partners who can never quite seem to get it together. No matter how many times they tell “this time it’s different,” it never is.
But perhaps nowhere is the quote more appropriate than in finance. This seems to be one area of human endeavor where people seem constitutionally incapable of learning from past mistakes.
Making loans to uncreditworthy borrows? Banks seem to do that about once every ten years like clockwork. In fact, they’re doing it now. Delinquent auto loans recently hit a new all-time high.
Lend money to perpetual basket cases like Turkey or Argentina? Bond holders seem to do that once per decade or so as well.
And getting caught up in the latest, greatest bubble?
Yes, that seems to be a rinse and repeat cycle as well.
Writing for Barron’s, Adam Seessel of Gravity Capital Management, commented that “reversion to the mean is dead.”
In other words, the classic value trade of buying beaten down, out-of-favor stocks and selling expensive hype stocks is over. Value investing no longer works:
As for returning to normal, does anyone really believe that is going to happen, for example, to Amazon.com or Alphabet? E-commerce and digital advertising still have only a small share of their global market, despite nearly a generation of growth. Other industries—ride-sharing, online lending, and renewable energy—are smaller still, but also show every sign of being long-term winners. How are these sectors going to somehow revert to the mean? Conversely, how will legacy sectors that lose share to these disruptors return to their normal growth trajectory?Reversion to the Mean is Dead
Seessel isn’t some wild-eyed permabull growth investor. By disposition, he’s more of a value investor. But after a decade of underperformance by value investing as a discipline, he’s wondering if it really is different this time.
It’s a legitimate question to ask. Not all trades revert to the mean. Had you been a value investor 100 years ago, you might have seen a lot of cheap buggy-whip stocks. But they ended up getting a lot cheaper as cars replaced horse-drawn carriages.
Likewise, might banks and energy companies today be at risk today from new disruptors like green energy and peer to peer lenders? And will the winners of the new economy just continually get bigger?
Well, maybe. Stranger things have happened. But before you start digging value investing’s grave, consider the experience of Julian Robertson, one of the greatest money managers in history and the godfather of the modern hedge fund industry. Robertson produced an amazing track record of 32% compounded annual returns for nearly two decades in the 1980s and 1990s, crushing the S&P 500 and virtually all of his competitors. But the late 1990s tech bubble tripped him up, and he had two disappointing years in 1998 and 1999.
Facing client redemptions, Robertson opted to shut down his fund altogether. His parting words to investors are telling.
The following is a snippet from Julian Robertson’s final letter to his investors, dated March 30, 2000, written as he was in the process of shutting down Tiger Management:
There is a lot of talk now about the New Economy (meaning Internet, technology and telecom). Certainly, the Internet is changing the world and the advances from biotechnology will be equally amazing. Technology and telecommunications bring us opportunities none of us have dreamed of.
“Avoid the Old Economy and invest in the New and forget about price,” proclaim the pundits. And in truth, that has been the way to invest over the last eighteen months.
As you have heard me say on many occasions, the key to Tiger’s success over the years has been a steady commitment to buying the best stocks and shorting the worst. In a rational environment, this strategy functions well. But in an irrational market, where earnings and price considerations take a back seat to mouse clicks and momentum, such logic, as we have learned, does not count for much…
I have great faith though that, “this, too, will pass.” We have seen manic periods like this before and I remain confident that despite the current disfavor in which it is held, value investing remains the best course. There is just too much reward in certain mundane, Old Economy stocks to ignore. This is not the first time that value stocks have taken a licking. Many of the great value investors produced terrible returns from 1970 to 1975 and from 1980 to 1981 but then they came back in spades.
The difficulty is predicting when this change will occur and in this regard, I have no advantage. What I do know is that there is no point in subjecting our investors to risk in a market which I frankly do not understand. Consequently, after thorough consideration, I have decided to return all capital to our investors, effectively bringing down the curtain on the Tiger funds.
Had Robertson held on a little longer, he would have been vindicated and likely would have made a killing. Tech stocks rolled over and died not long after he published this, and value stocks had a fantastic run that lasted nearly a decade.
Today, I see shades of the late 1990s. The so-called “unicorn” tech IPOs this year were Uber and Lyft. Neither of these companies turns a profit, nor is there any quick path to profitability. These are garbage stocks being sold to suckers at inflated prices.
I’ll stick with my value and income stocks, thank you very much. And in Peak Income, we have a portfolio full of them.
This month, I added a new pick offering a 7% tax-free yield. That’s real money, and I don’t have to worry about selling to a greater fool.