Two months ago at the annual Benjamin Graham Conference in New York City, billionaire hedge fund manager Leon Cooperman told the audience that their industry was on the ropes.
“[O]ur industry is in turmoil. It’s very ironic because you’ve got Clinton and Sanders crapping all over us and they don’t realize Wall Street is in the midst of a very serious downturn. . .”
He’s right. Investors are bailing on hedge funds in record numbers because these hot shot investment managers aren’t able to generate meaningful investment returns.
All the tricks that used to work for them in the past are now falling flat.
And as Cooperman explained, there’s a giant consolidation right now where only two types of people will be able to make money in financial markets.
The first is traders… specifically high frequency traders (HFT).
These are the gigantic financial institutions and billionaire math geniuses who build sophisticated algorithms that buy and sell stocks at blinding speed, sometimes entering and exiting positions in just a fraction of a second.
High-frequency traders rarely (if ever) hold positions overnight, let alone for months and years.
They’re not interested in the fundamentals of a business, merely the volume and momentum of the stock.
The second group is long-term value investors– people that are trying to buy a dollar for 50 cents.
Value investors care very deeply about what they’re buying; in fact, they don’t buy stocks, but rather shares of high quality businesses with talented, honest, energetic managers.
These two methods– trading vs. value investing– are remarkably different.
To be a trader today means competing against titans like Goldman Sachs, with their legions of PhD quantitative analysts, plus some of the most advanced networks and intellectual property in the world.
Or even worse, competing against high-frequency traders who have
paid bribed the exchanges so that their own servers can be co-located in the same building as the exchanges’ servers.
This enables the traders to receive information from, say, the New York Stock Exchange, a fraction of a millisecond before anyone else.
But in that fraction of a millisecond, the HFT firm’s algorithms can process the information and place trades ahead of the crowd.
That’s the environment that traders are competing in.
And to be successful in this environment, you need an edge. You win by being smarter, accessing information faster, or developing superior technology.
Value investing is entirely different.
Value investing is about patience, common sense, and good old fashioned hard work.
Here’s a great example– Tim Staermose, our Chief Investment Strategist at Sovereign Man, recommended a business called Nam Tai Property to subscribers of his premium investment newsletter, the 4th Pillar.
Around New Year’s 2015, Nam Tai had $261 million in CASH, plus a ton of real estate in Asia conservatively worth $221 million, even at recession prices.
Yet the company’s market value at the time was $204 million.
So in theory you could buy the entire company for $204 million, put that entire amount right back in your pocket, and still have $57 million in free money left over, PLUS $221 million in real estate.
It was an unbelievable deal.
But Tim was skeptical (as usual), so he hopped on a plane and spent a LOT of time on the ground investigating the company’s assets first hand to determine for himself that it was real.
It was absolutely real. (We’ll discuss later this week why the market sometimes presents these crazy opportunities…)
So with some common sense to recognize a great opportunity ($57 million in free money… duh.)
Plus a LOT of hard work for Tim and his team to make sure that it was legitimate and real.
Plus a little bit of patience (it took about 18 months for the stock to surge), Tim’s 4th Pillar subscribers are up 108% on Nam Tai Property.
That’s the great thing about value investing: it’s not rocket science.
Yes, investigating a company’s assets and analyzing its balance sheet is a skill, and one that can be learned. Great value investors like Tim have become masters of it.
But it’s not about being smarter or better or more advanced than everyone else. It really is about patience, common sense, and hard work.
Between the two, it’s clear to me that DEEP value investing is the superior approach.