Value stocks, bless their little hearts, almost never come into vogue. How could they? Who wants to wait around forever for a decent stock to sell at ten times earnings? Who wants to finally buy it and then hold it ‘til hell freezes over before it’s value is recognized by other investors? And then, just when the stock is finally rocketing up, it has to be sold because it’s now too expensive. Hey, where’s the fun in that?
Ah, but how much more exciting it is over in the growth/momentum world! You buy a stock that’s already doubled or tripled in value, paying 30X earnings. You watch its P/E go to 40X, meanwhile having bragging rights on the golf course and around the water cooler. You’re a sophisticated, contemporary, cooler-than-thou guy (or gal), comfortable in the new new world of biogen, IT, obscure Chinese app companies, whatever. Investing is fun.
In fact, the market behavior of growth/momentum stocks – oh, hell, let’s shorten it to “gromentum” stocks – seems to have been designed by B. F. Skinner(1) to ensure that investors will become and remain addicted to them. Typically, gromentum stocks come into vogue and stay in vogue for a long time. You don’t have to worry about paying down, being patient, selling when the price gets too high. You buy-and-hold and it works perfectly – you’re doing better than Harvard, Yale, Buffett. You’re obviously an investment genius!
Consider the 1990s, when a perfect storm of global developments caused stock markets around the world, but especially in the US, to rise to staggering heights. The Soviet Union had collapsed, ending the endless Cold War; free market ideas were popping up in the most unexpected places (China, e.g.), converting millions of impoverished people into middle class people; the US was enjoying the “Cinderella economy,” characterized by strong economic growth and low inflation. Most important of all was the astonishing appearance of this thing called the “Internet,” which nobody understood but everybody knew was the most important thing ever.
As the 1990s cruised by, people who knew nothing whatsoever about investing racked up performance numbers that humiliated bumbling old fools like Harvard, Yale, Buffett. All you had to do was buy any old Internet stock, any old tech stock, any old gromentum stock, and you were a genius. And this bizarre world didn’t last for days or weeks or months, it lasted for years and years.
If you happened to be unfortunate enough to have recently founded an investment advisory firm based on boring old investment principles like value, diversification and patience, well, you were in deep trouble. At every client meeting some cooler-than-thou person would hold up a chart showing your firm’s performance for that quarter (or year, or past several years) compared to the performance of gromentum stocks. For a while, a couple of quarters, maybe even a year or two, your explanations held water: value, diversification, patience, these were the tried and true principles that had been relied on by “intelligent” investors ever since investing was invented by Benjamin Graham and David Dodd.
But as time went by, these explanations started to sound less like explanations and more like excuses. My firm, Greycourt (and similar advisors), simply didn’t “get it.” The investment world had changed profoundly, and advisors who clung to the hoary old principles that had worked way back in the 1980s were passé. Investors like Warren Buffett were ridiculed on the exciting new financial talk shows.
And why not? Buffett’s performance, while just fine in absolute terms, looked pathetic versus even ordinary growth stocks, forget the spectacular tech stocks. In 1996, when gromentum stocks were up 37%, BRK was up 6%. In 1999, when the NASDAQ was up (are you sitting down?) 86%, BRK was down 20%! If Buffett was history, what chance did an advisory firm have if it was not only buying value stocks, but also (AACK!) bonds, and also (AACK!) hedge funds, and also (AACK!) real estate, and so on. Value was dead and diversification was dead and patience was something for Job to think about, not investors.(2)
By the middle of 1999, clients were becoming extremely restive and many value-oriented managers and advisory firms began to bleed customers. The most famous value manager of all, Sanford C. Bernstein & Co., had such poor (relative) results that it threw in the towel and sold itself to, naturally, a gromentum stock manager, Alliance Capital, despite the fact that Alliance wasn’t good enough to shine Bernstein’s shoes.(3)
For a young advisory firm that didn’t yet have many assets, losing clients, especially for all the wrong reasons, was a painful experience. Between November of 1998 and October of 1999, Greycourt was fired by three clients – a large proportion of our total client base at the time. In my next post, we’ll look at what happened to some of the investors who fired good advisors in those days. We’ll do that not to gloat (well, maybe to gloat a little), but because the lessons of those days resonate powerfully right now.
(1) For the benefit of my readers who went to college some time in the last two decades and therefore didn’t learn anything, B. F. Skinner was the father of behavioral psychology. He discovered that intermittent reinforcement of an action caused people (and rats) to become addicted to any dopey thing that came along.
(2) Job, who was apparently a gromentum investor, lost all of his capital in one day. His wife, who was cooler-than-thou, encouraged Job to give up and die. Job 2:9.
(3) Among other problems, Alliance Capital was charged by the SEC with undisclosed market timing in the Alliance mutual funds complex. Alliance was fined a staggering $321 million.
Next up: The Semi-Intelligent Investor, Part 4
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Please note that this post is intended to provide interested persons with an insight on the capital markets and is not intended to promote any manager or firm, nor does it intend to advertise their performance. All opinions expressed are those of Gregory Curtis and do not necessarily represent the views of Greycourt & Co., Inc., the wealth management firm with which he is associated. The information in this report is not intended to address the needs of any particular investor.
