Street Capitalist: Event Driven Value Investments

Most readers will recognize Jason Zweig as the guy who revised The Intelligent Investor by Benjamin Graham. In the 2003 annual letter (PDF) to Berkshire Hathaway shareholders, Warren Buffett Remarked that The Intelligent Investor is his “favorite book on investing” and that Zweig did a “first-class job in revising” it.

This was actually one of the first investing books that I read. What I liked most was Zweig’s own remarks after every chapter. Zweig was able to take a book written a long time ago and make it easy to digest and show how Benjamin Graham’s concepts parallel what is going on in modern financial markets. The commentary he added was helpful because even if some of the material was hard to understand, I was able to come back to it after reading the commentary.

So today I was pleased to see that Zweig would be penning a new column at the WSJ. Zweig says:

In the last long bear market, 1969 to 1982, stocks returned just 5.6% annually; after inflation, investors lost more than 2% a year. That mauling by the bear made stocks so inexpensive that over the ensuing 18 years they went up 18.5% a year, enough to turn $10,000 into more than $200,000.

The people who so far this year have yanked $39 billion out of U.S. stock funds, and $6 billion out of exchange-traded stock funds, do not understand this. But if you are still in your saving and investing years, a bear market is a gift from the financial gods — and the longer it lasts, the better off you will be. Instead of running from the bear, you should embrace him.

This new column takes its name from the classic book by Benjamin Graham, who wrote that “the investor’s chief problem — and even his worst enemy — is likely to be himself.” I hope to help you understand the chaotic markets around you, and the even more treacherous enemy within. For, as Mr. Buffett has also pointed out, investing is much like dieting: It is simple, but not easy. Everyone knows what it takes to lose weight. (Eat less, exercise more.) Nothing could be simpler, but few things are harder in a world full of chocolate cake and Cheetos.

Stop Worrying, and Learn to Love the Bear (WSJ)

With many investors hurting right now, a Graham themed column might be just what they need. It would prevent them from pulling out of the markets all together and instead expose them to concepts like Mr. Market and the need for a margin of safety when you invest in companies. Those two ideas will be essential for surviving and thriving in the negative market we seem to be in.

It looks like the WSJ has not set up an RSS feed yet for Zweig’s column, but since I’m really looking forward to them I’ll be linking and posting excerpts whenever I see them.

Today, Abnormal Returns asks us what role it should have in the future of the investment blogosphere. This question brings to mind some of my own thoughts on investment blogging and some ideas I’ve had in my head for a while. Before addressing what Abnormal Returns should be, I’d like to go over some of the ideas in that post.

Quality Control by Blog Type

Quality control is the most important problem facing investment blogs today. The metrics for assessing quality are dependent upon the type of blog. In the investment blogosphere, blogs generally come down to two sides:

1. Commentator types, like Paul Kedrosky who mainly focus as a central source for news he thinks is important and an outlet for his comments on current events. Going to Kedrosky’s site will keep one informed, but is probably not the best place for learning investing.

Quality control with these blogs is hard to peg. There might not even be a need for quality control. These sites are more like opinion pieces in the newspaper and in that case, they don’t have to be correct. They only need to serve as a place to get a specific type of perspective.

2. Trader/investor sites. These sometimes overlap with the previous topic. They’re written from a trader or investor’s point of view, and often you will see posts that actively go over new investment strategies or even ideas.

It’s my belief that quality control here is vastly more important, there are actual investment ideas being generated here. The best thing that these sites can offer to their readers is a level of transparency in their posts. For my blog, I list the positions I hold and make posts that note my entry date in these positions, and update a few times a year with how they’re doing. If I propose an investment idea i’ll also address whether or not I actually hold a position in the company myself. Both of these are important aspects that I believe should be adhered to.

A while back, I took part in an academic study on the investment blogosphere by a prominent university where I was asked questions on how I know what blogs to read and how I rate them. I specifically mentioned that I look at the track record of these bloggers in order to see whether or not they’re worth reading. A track record does not have to solely be your actual performance, it can also be the way you research, the way you summarize and explain your methodologies for how you invest/trade. All of these are sources that actually teach us and probably teach us more than a simple performance number — this is the key to monitoring the quality of trader/investor blogs.

Gatekeepers, Traffic, and Quality Control

I look at Abnormal Returns as the Drudge Report for investors. Often, I’ve discovered new sites by just visiting AR and they get added to my RSS Feed list. AR seems to take an active approach to showing a variety perspectives on one of its daily themes which makes it worth reading. A key difference between Matt Drudge and AR is that they at least appear to have different motives. Drudge pushes a certain ideology, while AR pushes themes of the day.

One thing I want to point out is that “gatekeepers” like AR can actually help in quality control. Linkfests like Abnormal Return push traffic to us which can help start discussions and create discourse.

If you compare us (financial bloggers) to our older second-cousins (political bloggers) there are some big differences. The political blogosphere is vastly greater than our own. Looking at some of the latest traffic numbers, you’ll see that sites like the Drudge Report (which does not actually report but showcase) and the Daily Kos or Huffington Post actually receive more hits than many newspapers.

Nielsen Online Names Top 30 News Sites

With such huge numbers in traffic, these groups are able to bring together larger debates than we can, which can uncover shoddy analysis and perform fact checking.

Look at the traffic numbers of major financial media outlets: the Wall Street Journal, the Financial Times, the Economist (or FMSM- the financial mainstream media). They generally perform better than the closest “independent” blogger driven competitor available - Seeking Alpha. Part of this is because we’re thinking strategically when we conceive our blogs. Most bloggers realize that there is little chance of them competing with the financial press establishment in general reporting.

The other part is because the FMSM typically have strong brand names and are associated with quality. In financial journalism, quality is an important factor, and I think this is primarily why the financial press is an oligopoly of sort. The barriers to entry - earning the recognition that you’re a worthwhile voice to listen to is difficult.

Some of us fight the war of the flea. We (initially) write about niche areas in finance that are not served by the FMSM.

To give you a few examples, look at Equity Private, Tanta (Calculated Risk), or Macro Man. Each brings a perspective that simply could not come from your run of the mill financial journalist. Unfortunately, what ends up happening is that these blogs become valued by industry professionals but typically lack a broader appeal.

Calculated Risk is probably an exception tot his, but part of that is probably because of the constant news about sub-prime mortgages in the news. I’ve been wondering if the broader audience will keep reading sites like Calculated Risk, after the credit mess blows over.

The future for Abnormal Returns and the investment blogosphere?

I can’t help but wonder about the future of the investment blogosphere and the FMSM. Will a blogger driven site ever match the traffic of the WSJ? To do so would be tough. First, content would have to be aggregated. This alone puts up a host of issues. Many bloggers have their own advertising and feel that aggregators take their content for free, without contributing traffic to add meaningful revenue to their blogs.

Then, somehow content would have to be screened. Seeking Alpha is just a mass glutton for content, they end up carrying some trashy contributors. The Huffington Post and Breitbart both supply the news, but also offer contrasting perspectives. The Breitbart blog network is mostly comprised of conservatives while Huffington Post offers a liberal perspectives. Maybe new investment aggregators could come onto the scene that provide different perspectives on the market. Some contrarian, some more mainstream. The fact that these aggregators would have content written by investors and traders, or commentators with professional backgrounds would help differentiate themselves from the typical financial journalists.

Finally, there would be the issue of the financial press broadening its scope. The FT and WSJ feature extensive coverage on current events, foreign and domestic. An aggregator would have to feature that content as well to match and be a true competitor.

With respect to Abnormal Returns though, they should stick with what they’re doing - making a good daily linkfest. I’m actually pretty glad that they have not taken a Digg or Reddit approach. Some sites are trying to become the Digg for financial news, but the problem with this model is that it thrives on mob mentality. Contrarian perspectives can get ignored by these sites and makes the editorial nature of AR’s linkfest advantageous. As for pursuing profit, as long as it is tasteful, I don’t see how a few ads here and there could hurt.

GRETCHEN MORGENSON is pretty well known for her bad financial journalism which is strange considering she’s at the New York Times and has a Pulitzer. Maybe the financial world has become too complex for her. Maybe her editors would rather that she sacrifices her journalistic integrity to print sensationalist hit jobs. I would have thought that some of the criticism she received at Calculated Risk would have resonated, but that is clearly not the case. She recently wrote an article on Fairfax Financial (FFH) and Whitney Tilson has published a rebuttal which can be found here.

Tanta, at Calculated Risk says in her Morgenson Watch:

I don’t know how many posts I’ve written on Gretchen Morgenson’s terrible reporting. I guess I’m going to have to start keeping score. “Can These Mortgages Be Saved?” Can this “reporter” be saved?

Ms. Morgenson, if you want to keep up on your mission to portray Countrywide in the worst possible light, you are going to have to get an education from a reliable source at some point about how the mortgage industry works.

Even before that, Tanta finds more questionable reporting from Morgenson:

I know how disappointed everyone would be if I passed on an opportunity to publically describe Gretchen Morgenson as a tendentious writer with only a marginal grasp of her subject matter and what appears to be an insatiable desire to make uncontroversial facts sound sinister.

Even Felix Salmon, at Portfolio magazine had to take up the job of setting the facts straight on one of Morgenson’s misleading stories. To put things in perspective, at Calculated Risk, 37 entries are devoted to Gretchen Morgenson and her bad reporting.

Ms. Morgenson’s misrepresentative reporting has resurfaced with her piece on Fairfax Financial. Once again, she tries to twist the facts about Fairfax to paint it out as some poorly operated sinister insurance company. Fairfax is a complicated situation, there is no doubt about it, but the reporting in her story was either inaccurate or, negative facts were never put into perspective. She criticized beneficial investments - such as credit default swaps. We should note that her understanding of such products, as exemplified by Mr. Salmon’s piece are basic and often faulty. She also tries to criticize the company’s runoff operations which are actually around historic lows, have slowed, and are quite positive for the company.

Whitney Tilson says it best:

We usually enjoy her work, but this story on Fairfax is certainly an anomaly: it’s a smear and a hatchet job, filled with innuendo, inaccuracies, and misleading statements.

As one of our largest positions, we know Fairfax well and, having once been short the stock, we’re very familiar with the short thesis, which we (obviously) believe is now outdated and wrong. We welcome contrary points of view and, in fact, when we disclosed that we were long the stock last August in a Value Investor Insight article (the stock’s up 22% since then), we heard from some investors who were short the stock and had insightful conversations with them.

Morgenson’s article, however, sheds no insight whatsoever and, in fact, leaves the reader with a picture of Fairfax that is the polar opposite of reality. Let’s go through it carefully:

Fairfax Financial: Anatomy of a Hatchet Job (SeekingAlpha)

I often seek out contrary perspectives on my investments. I think it is important to receive dissenting views. However, there’s a clear line between a contrarian article and a “hatchet job” and I think we can all agree that Ms. Morgenson crossed that line.