Friday, April 4, 2014

"Long-Term Investing", Eurozone Bank Recapitalization, and Investors' Tangibility Bias

This is a grab-bag of thoughts that struck me today while I was at an asset management conference.

1) "Long-term investing" means different things to different people. It's fairly common to hear investors claim that they're long-term investors (particularly those with a value bias). But I see at least two possible definitions of long-term investing when it comes to specific securities:

a) Being patient for a cycle to turn and for the market to recognize the value of a security. It's uncontroversial that patience is often required for successful investing. However, implicit in this is that the annualized return on the security may not be as high as expected (not to mention that capital is tied up in the process). There's also the danger that stubbornness can be mistaken for patience. It's no wonder there's a dark joke that "an investment is a trade that hasn't worked out yet."

b) Deliberately being invested in a security for a long period of time. I can't think of anything inherently good or bad about this from the standpoint of investment results (though I'd argue that it's better for capitalism when long-term shareholders can engage with, and discipline, management), but many value investors are not long-term investors by this second criterion. They do not necessarily plan to be long-term shareholders (see joke above). Buffett described himself as a "cigar butt" investor, but changed his viewpoint influenced by his interactions with Charlie Munger, as well as his poor investment in Berkshire Hathaway (I initially typed Berkshite Hathaway, and even Buffett may agree that was an accurate, if unintended description of the investment!). Many special situations/deep value investors are proud cigar butt investors. Surprisingly, I think some growth-oriented investors fulfill this criterion much better. Phil Fisher, generally considered a "growth investor", wanted to own companies for a long time and profit from their long-term earnings accretion, rather than profit from a one-time reassessment of a company's fundamentals. (His book, Common Stocks and Uncommon Profits, was something I wrestled with for awhile in my more strictly value-oriented days.) But these days, most people think of growth investors as trading in high-flying, momentum stocks. Are growth investors getting a raw deal in public perception?

2) Who is financing the great Eurozone bank recapitalization? We keep hearing that the Asset Quality Review will allow banks to deleverage, thereby reviving bank lending and the credit transmission mechanism for monetary policy. But I heard today from some very smart distressed debt investors from big name funds (Baupost, Oaktree, Apollo, Strategic Value and CarVal) who said how uncomfortable they were with distressed debt valuations in general, including for financials. (On a day when the Spanish government 5-year yield traded below the comparable US security, I have to think they've got a point. Anyone making the argument that Spanish deflation makes that a natural state of affairs is crazy, since unlike Japan, the Euro periphery may eventually decide enough is enough.) The CIO of a very large hedge fund also told me that they were interested in European bank investments (through various parts of the capital structure) but that "others are interested at much higher prices than we are." So who is providing the capital to Eurozone banks? Whoever they are, they must be either more risk-tolerant or less return-sensitive than the distressed guys I heard from today.

3) Do investors suffer from tangibility bias? I've always assumed that investors prefer returns from tangible assets to intangible ones, which might explain why people often overpay for property. Institutional investors often talk about investing in "real assets" like real estate, shipping and aircraft. But take shipping for example - surely one of the most volatile industries to invest in, and a veritable minefield for the uneducated investor. It's precisely the "real" nature of the asset that leads to volatility since a low elasticity of supply means you end up with a large fleet for ages. I know there's stuff out there on tangible versus abstract risks, but I haven't seen any mention of such a bias in behavioural economics. Does anyone know if there's research on this relating to investments? 

1 comment:

  1. Very interesting - I am studying the tangibility bias that you describe here - would love to get your thoughts offline.

    Remi Trudel -