Posted December 21, 2011 at 3:50 am
Note: this is an excerpt of a more detailed member update that first appeared inside the vault on August 29th.
by Barry Goss
On the front of our website (WealthVault.net), under the Managed Trading Account section, we have had a concise statement that has been showing off its wares for many months:
“We find traders who trade well and let the ivory tower economists do the worrying!”
It’s the “us not worrying” part that has seemed to make some of our friends question our mental state.
One recently explained that maybe we should spend more time at least highlighting bigger macro events like: the ongoing debt crisis, issues in Europe, institutional investors demanding their banks hold more cash for them, the looming talk of recession, etc.
I asked him: “Do you really think what the market already knows hasn’t factored these larger economic issues in?” and “Do you realize that our well-read members do keep abreast of what the market, offered up via various news outlets, knows?”
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He looked confused, but that is how somebody who over-analyzes his way through life, without experiencing personal execution, is supposed to look.
So, imagine this:
You’re the kind of person who can analyze risk; you have a natural tendency to see macro trends that are precipitated by politics and monetary moves; you have a very good academic mind but you ALSO have a knack for seeing human progress, value, and smelling opportunity in the face of fear and media-led sensationalism.
So, you put yourself into Harvard Business School, work your ass off, and the result of that work is you graduate at the top of your class. And, in undergraduate school, you already showed a fascination for the markets by working briefly for a value investor — one of them thar researchers who only bags quality companies at bargain prices and holds them for the long term.
For all the above expertise and experience, a group of wealthy families get together, talk about you in a secret private meeting, track you down and then tell you they want to give you $27 million to manage.
This is exactly what happened to now renowned hedge-fund legend, Seth Klarman, in 1982.
This was the start of his firm, the Boston-based Baupost Group.
Baupost has returned 19% a year, net of fees, since Klarman started it in 1983, vs. 11% for the Standard & Poor’s 500-stock index.
And when you have those kinds of sustained returns over time, people come clamoring for your advice; they want your secret sauce.
And with only one book ever written by Klarman, which is all about his thoughtful strategies for making it big with value stocks, you can imagine how much demand there is for getting a copy.
As of yesterday, I saw a copy on eBay for over $1,000.
But today, you’re going to get a very short nugget of his core philosophy and, guess what, it’s not too far removed from the very statement we have on our website.
Regarding his firm’s philosophy, he states that “We worry top down and invest bottom up.”
And, it’s also the core approach we have here at the WV:
When we’re in self-directed investing mode — i.e., picking individual stocks, funds, or other such instruments we can buy through regulated exchanges — we keep an eye on the big picture, without claiming the sky will fall, and then go look for good deals by scrutinizing the merits of price, business model, good management, etc.
Here’s an example:
10% Money Machines: For quite some time, we have been very bullish on select mortgage REITS; companies that basically make their money by buying mortgages, and then leveraging these investments by borrowing repurchase agreements against them.
These companies pocket the difference between the short-term rate they are paying and the longer-term / higher interest they collect. This is known as the “spread.” And, because of the current underlying macro economic and political environment (loose monetary policy and near-zero rates), our risk is low.
We can “Worry top down” about the above investment vehicles by simply knowing what our biggest concerns will be when the yield-curve flattens or inverts.
But, it’s easy to simply do a brief big picture assessment and see that with QE still on the table (Keynesian stimulus); slow economic growth; and little dramatic changes in policy (coming election), the current steep yield-curve (what these money machines feed off) isn’t changing anytime soon.
So, we continue to like setting aside a portion of our money into certain REITs, and we affectionately call these (and others listed) our Cash With Flash IVs.
You can see that we’ve already done a bit of research on one in particular, and have “invested bottom up” by ensuring it’s still a good deal.
When you click on our Where To Stash Your Cash page, you’ll see ____ listed (at the bottom of the table).
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