Attractive fund managers, short selling, moats and guru investors
The best investing blogs and podcasts from the past week
If you had to choose a fund manager, what would you look for?
An obvious answer would be past performance. But that would be a pretty poor choice of criteria. We all know the powers of mean reversion are ruthless in money management. Those that have done well in the recent past are rarely the winners tomorrow.
What else? It could be a sense that they’re a safe pair of hands, or have a style or process you believe in, or some kind of strong ethical streak. Maybe you just want someone who seems like they know what they’re doing (which isn’t that unreasonable).
What about… hear me out… someone that’s good looking?
At first sight that seems like an utterly insane reason. Surely being attractive is fairly low down the list of good reasons why you’d hand over your savings to someone.
But is it?
In psychology, the ‘halo effect’ is the habit in humans of seeing something positive in a person and assuming it applies to their other traits too.
You could, for example, have seen that Bernie Madoff was an astute, highly-respected and well-connected man and decided he was the perfect place for your money.
You might have felt that Neil Woodford’s swashbuckling self-assuredness with his new funds would show up in on-point stock selections.
Over and over you can find examples where appealing strengths in some places are desperately lacking in others. But it’s not always the case…
Did you know, for instance, that there’s evidence that attractive analysts make better earnings forecasts than unattractive analysts? (This research shows it)
Or that attractive CEOs create a bit of a price premium for their company shares around the time of earnings announcements, M&A activity and TV appearances? (You can read about that here)
So how does it stack up for fund managers?
Well, recent research from the Chinese market explores this question using ‘state of the art’ techniques to measure facial attractiveness.
It turns out that attractive money managers do pull-in higher fund flows than their less aesthetically-pleasing peers, especially when their pictures are on fund selection websites.
But that’s where the good news ends for good looking fund pros.
In a startling win, ‘facially unattractive’ fund managers outperformed funds with attractive managers by over 2% per annum. Not only that, unattractive managers had better stock picking skills, significantly higher active share (and were more concentrated) and preferred value stocks.
By contrast, attractive managers showed a preference for holding lots of ‘lottery stocks’ and chasing past performance. Their portfolios were more volatile and riskier, too.
So there you have it. If you happen to be picking funds, a strategy of long-unattractive / short-attractive could be the way to go!
Have a great weekend,
Ben
Highlights from the past week
AJ Bell - [Video] Terry Smith: what I plan to do with Fundsmith Equity Fund next
Fair play to Dan Coatsworth for kicking off this interview with a robust question to Terry Smith about whether the fund manager might have done more to protect his investors last year. That said, Smith quite rightly says that he’s been warning for years (as mentioned in his recent letter to shareholders) that Fundsmith won’t ever try to time the market.
A Fully Invested reader said to me recently that there really isn't much that Terry Smith says that he finds himself disagreeing with - and that sums things up rather well. Criticism of inaction naturally draws questions about all the other times Smith could have done something, but doing nothing worked out for the best. Beyond that, it’s great to hear him so bullish on growth and sticking to his strategy like glue.
Macro Ops - Marc Cohodes’ Short Selling Strategy Explained
Marc Cohodes is one of what you might describe an elite band of old-school short-sellers in the US that has been through the mill on several occasions. He’s well known for finding fraud and bad practice in quoted stocks and then shorting them (you can find him on Twitter here: @AlderLaneEggs). This is a fun post on a ‘Cohodes checklist’, which whilst obviously useful for short sellers is applicable for any investor, long or short. The list is as follows:
“The Wig” Indicator
Bet The Jockey
The Eighth Grader Test
Fight or Flight
Thesis Creep
If you’re wondering what “The Wig” indicator is… it’s a symbol of the illusion of perfection that some fraudsters like to create. Cohodes says “my batting average is close to 10% when I find an executive who wears a wig.”
Todd Wenning, Intrinsic Investing - Playing Long Games: Focus on Companies with Moats and Relevant Products
This article by Todd at Ensemble Capital explores one of the challenges of trying to understand company moats, and that’s ‘durability’. The fact that all companies have a life cycle is well understood: some burn very brightly for a short time and others grind on for many decades, perhaps longer. But it’s also true that companies can reinvent themselves, and extend their relevance and their existence. The balance for investors is having confidence in companies to deliver outsize growth and returns and be open-minded about where in the business cycle they really are.
Security Analysis - Is Hunting for Moats a Waste of Time?
Here’s another article on the subject of moats, but this time through the lens of a value investor. It explores the well trodden path that follows Warren Buffett’s style of investing from deep value ‘cigar butts’ to higher quality firms with defendable competitive advantages. For some value investors moats don’t even exist, while for others they attract such a price premium that they’re not worth bothering with. This article makes the case for them actually being a potentially undervalued type of company, and certainly one that the market occasionally puts on sale.
Richer, Wiser, Happier podcast - Investing amid uncertainty, with Joel Greenblatt, Bill Miller, Howard Marks, & François Rochon
This podcast from William Green is all about investing in times of heightened uncertainty. It’s a departure from his usual deep interviews with one person, and instead is a collection of highlights from four legends he’s spoken to over the past year. It’s actually really good.
The hour and 20 minutes starts with Joel Greenblatt on a near disastrous deal he got involved in just after he launched Gotham Capital. The lesson? Bad things happen and you’ve got to make sure you can live to fight another day. Next, do you have to be slightly crazy to be able to handle the emotions of investing? Joel’s answer… yes, but it’s not easy and you need to be able to adjust quickly and look around for new opportunities.
Bill Miller, the value legend, then talks about buying beaten up stocks in the heat of a crisis, and how the anxiety affects him. His advice is to “invest down to the sleeping point” - your own tolerance for pain and volatility.
Later on, Howard Marks calls emotion “the greatest enemy of superior investing” and François Rochon discusses why there will always be tough times but if you’re patient you will be rewarded.
Thinking & Strategy
Joachim Klement
Stories > Statistics
Morgan Housel
Risk and Regret
Capital Employed
Interview with Sean Westropp of Deep Sail Capital
Monevator
A cheap portfolio of cheap assets
Investor Amnesia / We Study Billionaires Podcast
Investing through post-bubble markets - Jamie Catherwood
Neckar's Minds and Markets
Was Tepper Wrong? Liquidity, Timing, and the Keynesian Beauty Contest
Stratechery by Ben Thompson
The Four Horsemen of the Tech Recession
Behavioural Investment
Why Do We Keep Making the Same Investment Mistakes?
Compounding Quality
How to outperform the market by Joel Greenblatt
Institutional Research
Verdad
We Measure What We Can
Schroders
"30-baggers": why the UK has more than its fair share
BNP Paribas
The low volatility anomaly – Still going strong after 50 years
Pictet Asset Management
Following the prophets: identifying effective analyst recommendations
Jenga Investment Capital
Global Outperformers
Securities & Markets
Charlie Huggins, Wealth Club
How I choose the companies I invest in – a worked example (RELX)
UK Dividend Stocks Blog
S&P 500 CAPE Valuation and Forecast for 2023
The Investor Way
E121 - Airtel Africa, Entain, Dr Martens, Shell, BT & Apple
Investors' Chronicle
The Companies and Markets show: BP & Shell's bumper profits, Unilever, housebuilders
Money Makers
Weekly Investment Trust Podcast with Jonathan Davis (04 Feb 2023)
Quality Small Caps
Small Caps Podcast with Paul Scott – Episode 5 for 2023