Investment Management Philosophy
"If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring." - George Soros
Investing with a long-term horizon offers an investor a strong advantage over much of the professional money management establishment. We've seen firsthand how many professionals chronically underperform due to their short-term orientation. They endure too much employment risk if their investment performance suffers for much more than even one year. This leads to managers chasing performance, overdiversifying, trading too much, closet-indexing, window dressing, and ultimately underperforming relative to their benchmarks.
Measuring investment performance on a quarterly basis is counterproductive at best, and even overemphasizing annual numbers can be misleading and result in poor investment decisions. Some of the best investment opportunities come from deeply undervalued and misunderstood situations that offer tremendous upside over an uncertain time frame. Having a longer-term horizon allows us to comfortably hold investments without being distracted by short-term "noise". It also keeps turnover and trading costs down.
"When everyone dislikes something it should be examined. When everyone likes something it should be examined." - Confucius
Successful long-term investing often means buying into fear and selling into greed. This translates into buying attractively valued securities when few others are interested in them and selling/avoiding overvalued securities that are universally loved.
One of our best investments was aggressively buying energy service companies in the mid-90's. At that time, oil was trading for $10 per barrel, virtually everyone despised energy stocks, and “The Economist" was calling for $5 oil. We similarly went long (bought) gold and precious metal stocks (and short the U.S. dollar) in the early 2000's when gold was trading at $300/oz and few were interested in the "old relic."
On the sell side, we escaped harm from the internet collapse of 2000 by recognizing the absurdity of the bubble (admittedly early) and avoiding the sector. We were also early in warning about the recent housing bubble and avoided the subsequent decline in housing and mortgage-related securities.
"Listen, business is easy. If you've got a low downside and a big upside, you go do it. If you've got a big downside and a small upside, you run away. The only time you have any work to do is when you have a big downside and a big upside." - Sam Zell
Wall Street likes to pigeonhole investors into a particular investment style camp - value, growth, momentum, growth-at-a-reasonable price, etc. We find this distinction a bit comical. It can be difficult enough at times finding truly attractive opportunities without limiting oneself to some subset of the investable universe. We search globally for investments that we believe have excellent return prospects relative to their risk, regardless of any Wall Street categorization.
"The worst mistake investors make is taking their profits too soon, and their losses too long." - Michael Price
We're able to focus on the longer-term in part because we focus on sustainable cyclical and secular trends.
"The latest trade of a security creates a dangerous illusion that its market price approximates its true value." -- Seth Klarman
The best business in the world can be a terrible investment if you pay too much for it. We are disciplined in valuing investments and will not buy securities that we believe are overvalued relative to their financial and business prospects.
We assess valuation based upon a number of measures, including discounted cash flow analysis, price/earnings, private market value, price/cash flow, and price/book value. We do not buy securities that depend upon a "greater fool" arriving to pay even more. In fact, we are likely to short such securities.
"Successful investing is anticipating the anticipations of others." - John Maynard Keynes
We take a global approach to finding attractive investment opportunities. This means two things. First, we consider all types of investments - stocks, bonds, options, currencies, cash proxies, etc., and we consider the merits of going long (buying) or short (selling) each of these. In this sense, we operate similarly to many hedge funds but without the excessive fees.
Second, a global approach refers to considering both U.S.-based investments as well as international markets. In recent years, an increasing number of international investment products have become available to U.S. investors at reasonable costs. This increases our ability to effectively diversify as well as to exploit undervalued and unrecognized opportunities.
"Never invest in any idea you can't illustrate with a crayon." - Peter Lynch
We only invest in securities/companies that we clearly understand. This is much more unusual than it should be. Few investors (including professionals) take the time to truly understand a firm's business, industry, and valuation or to really comprehend the complexities of some of the securities they purchase.
Enron is a great example. Before it imploded, we weren't able to find a single Wall Street analyst who was able to clearly explain to us how they made money. We never invested.
"The goal of investment is to find situations where it is safe not to diversify." - Charlie Munger
Most professionals will tell you that diversification within the stock market and across asset classes is undeniably a good thing. It is certainly sensible to a degree, but the benefits of diversification are typically over-emphasized. The benefits of diversifying across asset classes are based on relatively short-term historical correlations that are assumed to be constant. These correlations, however, change through time and often collapse during market dislocations.
When it comes to stock market investing, we believe that too much diversification can be a recipe for mediocrity. We also believe that diversification is often driven more by fear rather than prudence. Many professionals are overly diversified in an attempt to ensure that they don't significantly underperform their benchmark in any period. Of course, this also limits their ability to outperform and add value for their clients. All else equal, we'd rather own fewer highly attractive securities that we thoroughly understand than own a large number of securities that we don’t understand well.
Ultimately, the ideal degree of diversification within the stock market and across asset classes will differ for each client based upon his or her time horizon, goals, and definition of risk.
"My approach works not by making valid predictions but by allowing me to correct false ones." - George Soros
"In this business if you're good, you're right six times out of ten. You're never going to be right nine times out of ten." - Peter Lynch
Hope is not a strategy, and even the best investment manager should expect to be wrong at times. Despite our success over the years, there certainly have been misses. The key is to recognize these situations and be responsive.
When we buy a security, there is a thesis behind the purchase, and we closely monitor that thesis. A significant change in the story or fundamentals may result in a sale. A sale may also occur if a security becomes overvalued. Finally, we constantly endeavor to focus on our best ideas. A good security may be sold if those funds can be put to better use elsewhere.
Buying A Business - Not A Piece Of "Paper"
"Although it's easy to forget sometimes, a share of a stock is not a lottery ticket. It's part ownership of a business." - Peter Lynch
Equity represents ownership in a business. When evaluating a stock, we are evaluating a business; when we buy and sell a stock, we are buying and selling fractional ownership of a business. We are not trying to guess as to whether some piece of paper will increase or decrease in price. We are evaluating a business, its industry, its prospects, its management and the valuation of that business. We always ask ourselves whether we would want to buy the entire business outright.
"The investor's chief problem - and even his worst enemy - is likely to be himself." - Benjamin Graham
"As far as I am concerned, the stock market doesn't exist. It is only there as a reference to see if anybody is offering to do anything foolish." - Warren Buffett
Emotional investors seldom make good investors. Being able to keep a cool head whether your investments are working for or against you is critical if you're going to make good decisions over time. As your investment manager, one of the most important functions Aspera serves is to keep emotions out of the investment process.
Pulling The Trigger
"A committee is a group of the unprepared, appointed by the unwilling, to do the unnecessary." - Fred Allen
It’s not uncommon for some portfolio managers to spend a great deal of time researching and debating an investment, always needing to do just a little more research before making a decision. They suffer from "paralysis of analysis". In other instances, investment decision-making is left to committees that invariably tend towards group-think and backwards-looking "safe" decisions.
At Aspera, there is one portfolio manager who is responsible for all investment decisions. We know how challenging it can be to find truly outstanding investment opportunities, so when they do appear we don't hesitate to take advantage of them.