Landing monthly, quarterly or just once a year, ranging from dense and portentous to accessible and upbeat, absolutely riveting or life-sappingly dull – it is the investor letter, and for better or worse, few asset managers would be without it.
Often, this communication from manager to investor is purely informative and sticks to the bread-and-butter facts. But some managers see the letter as an opportunity to connect with investors, expound on investing theories and give a flavour of what is going on behind closed doors.
This quarter, the latest letter from Houston-based hedge fund Voss Capital caused quite the stir and made many business news headlines – but not because of its searing insights on shares invested or assets rising and falling in value (it didn’t mention those at all). Instead, it analysed, at considerable length, the book Thinking, Fast and Slow by Nobel-prize-winning economist Daniel Kahneman, explaining how the fund’s managers have tried to embrace Kahneman’s advice.
‘We have built many of the principles of the book into our investment process and believe it is a differentiating factor in our performance,’ the letter states, before going on to reveal how the fund’s managers and analysts, guided by Kahneman’s principles, take care to ensure their thinking is rigorous.
Said managers and analysts don’t regularly put themselves through the 100-hour work week; instead, they ‘work less to be less lazy,’ knowing that the most important work they can do is concentrate extremely hard and think very independently when required.
‘It is’, the letter tells us, ‘challenging, tedious work discerning the true business momentum of a company’ and much easier to accept typical opinion, so the fund managers take regular breaks and allow no time for ‘group think’. Analysis is done separately on potential investments and sent around, so there’s no need to persuade or debate others into the case for or against an investment.
Many other important principles from the book have been translated into Voss Capital’s approach: beware the tendency to be over optimistic, realise outliers tend to revert to the mean, observe the psychological difficulty of buying stocks that have disappointed. The managers also aim to have ‘news fasts’, ‘off-site reading days’, and holidays ‘off the grid’. In the office, they make every effort not ‘to watch the daily ticker’, because that begets anxiety, which begets the need to rethink and unmake decisions, usually unwisely.
What, you may wonder, is the point of such a non-specific newsletter – one which talks about investment techniques and ways of thinking, instead of talking about how investments performed over the quarter? The answer is that it builds understanding and trust between the fund’s managers and their investors. I’d challenge anyone to read the letter and not come away with the impression that the people at Voss Capital are thinking very hard and very carefully about where and when to invest. A refreshing change in an era when more investment decisions are made by algorithms than the human brain.
Another fund which has taken a similar approach is the boutique Australian asset manager Leithner and Co. Its latest letter to investors, the Leithner Letter, is a scholarly look (complete with footnotes) at the performance of John Maynard Keynes’ investments over the decades. The article carefully traces the fortunes of the economist from his early days of dabbling in short-term fashionable investing until, having lost not just one but two fortunes, he became suitably cautious and began to invest for the long-term. On his death in 1946, his personal fortune was quoted at £500,000 (around $14m in today’s money.)
As this newsletter ends with a long conclusion applauding Keynes’ decision to hold stocks through the Great Depression and the Second World War and refusing to sell off when prices crashed, it could be safe to assume that this approach is one that Leithner and Co. approves of.
‘Compared to most other market participants, he [Keynes] remained calm in 1929-1932, 1937-1938 and 1940-1942. Why buy shares whose prices have been falling? Why hold them as they continue to sag, and after many others have sold? Why sit on paper losses when it might be easier – emotionally, at least – to cut and run? At critical junctures, market participants’ transitory behaviour doesn’t reflect these investments’ enduring values…Keynes foresaw the day when bankers would once again be willing to lend, businesses would seek to hire and consumers wish to spend. He knew that even under the dourest assumptions prevailing at the bleakest times, his holdings were worth something.’
Many fund managers like to use their letters as a personal sounding board. This quarter, David Einhorn, hedge fund manager at Greenlight Capital, took aim at Paypal and Tesla entrepreneur Elon Musk. In fact, he re-quoted Dave Pell of Next Draft: ‘It’s pretty amazing that we live in an age when a CEO of two public companies can give a talk about colonizing Mars and shareholders don’t see that as a warning signal.’
Once Einhorn had finished criticising Musk, he went on to take a pop at the Fed: ‘We are more than seven years into an economic recovery, yet central bankers behave as if we’re still in crisis.’
Mockingly, he added: ‘It appears that the real criteria for raising rates are:
- Market forecasters fully expect a rate increase.
- The most recent move in the S&P 500 was positive.
- There is no trouble in foreign economies or financial markets.
- There are no potentially destabilizing geopolitical events, including foreign elections.
- The Cubs win the World Series.’
Outspoken investor letters are by no means unique to the US. Here in the UK, we have no small amount of fund managers and market movers prepared to stick their head above the parapet and call it as they see it.
Many investors in Personal Assets Trust look forward to their regular letter from chairman Robin Angus, as it is one of the few to give opinions and investment information in (usually) laymen’s terms. The latest October 2016 edition is several pages long, published like a 100-year old newspaper in three columns across the page and full of enjoyable musings.
‘Long-term forecasts of Brexit’s effect on the economy are not just inaccurate. They are worse than inaccurate. They are useless and hence dangerous,’ Angus warns darkly. But he goes on to reassure investors that safety is the primary concern of PAT because: ‘There has never been a time like this before. Our maps are inaccurate, our compasses no longer work and our investment SATNAV (dare I say PATNAV?) is defective and keeps going on the blink.’ Like a good preacher reaching the crescendo of the sermon, his fist is banging the pulpit as he thunders: ‘The long end of the conventional bond market is today’s entrance to Hell.’
There was further doom and gloom from Britain’s Brexiteering bear, hedge fund manager Crispin Odey, who is relentlessly downbeat in his October epistle. He predicts the bursting of the QE bubble with dramatic consequences, an 80% decline in the UK stock market and a general feeling that an end to all investing is nigh. You may finish reading it and wonder, if Armageddon is about to happen, what’s the point of shorting it?
By contrast, the annual letter from Warren Buffet, perhaps the world’s best-known investor, is almost always, just like its author, relentlessly optimistic. It has become something of an annual reassurance to us all. A February letter from Santa Claus. The last one quoted a Woody Allen joke:
‘Woody Allen once explained that the advantage of being bisexual is that it doubles your chance of finding a date on Saturday night. In like manner — well, not exactly like manner — our appetite for either operating businesses or passive investments doubles our chances of finding sensible uses for Berkshire’s endless gusher of cash.’
It also reassured us that despite so much news and indication to the contrary, everything is going to be OK.
‘As a result of this negative drumbeat, many Americans now believe that their children will not live as well as they themselves do. That view is dead wrong: the babies being born in America today are the luckiest crop in history.’ As the world awaits the inauguration of President Trump, here’s hoping that the sage of Omaha has called this correctly.
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