Investing In Latin America

The following is an excerpt from 7 Top Latin American Stocks to Buy, originally published on Kiplinger’s.

Brazilians have a tongue-in-cheek saying about their country. Brazil is the country of the future… and it always will be.

That’s probably a little unfair. Brazil and Latin America in general have grown and modernized to the point that their economies are barely recognizable to those who remember the commodity-driven economies of decades past. Latin America is highly urbanized and has a vibrant and growing middle class.

All the same, the region still has a long way to go to meet developed world standards. For example, per capita income in the United States, Germany and France is $59,495, $50,206 and $43,550, respectively, according to recent estimates by the International Monetary Fund. In contract, Chile – the wealthiest country in Latin America – has per capita income of just $24,558, slightly below Turkey and slightly above Croatia. Argentina and Mexico weigh in at about $20,000 each.

Rome wasn’t built in a day, and it will be a long time until these countries approach developed-world living standards. All need major investments in education and infrastructure to make that happen, and these take time.

In the meantime, intrepid investors looking to get a piece of that growth have abundant options at their disposal. Latin America is home to dozens of world-class companies that stand to benefit from the continued growth in the region. Today’s we’re going to look at seven solid Latin American stocks that you can hold for the long-term. The list is more heavily weighted to Brazil and Mexico, as these countries have the deepest capital markets and the broadest selection of liquid public companies. But up and coming growth darlings like Colombia and Peru are included as well.

Creditcorp (BAP)

Apart from Colombia, Latin America’s brightest star of the past 20 years has been Peru. Like Colombia, Peru has its share of domestic unrest. In the 1980s, Peru was essentially a failed state. But in the years that have passed, the country has managed to restore law and order and has adopted solid growth policies.

The problem with investing in Peru is its lack of large, liquid stocks. The handful of Peruvian stocks with healthy trading volume tend to be clustered in the metals and mining sector.

There is, however, one large-cap Peruvian stock that gives broad-based exposure to the growing Peruvian economy: Creditcorp (BAP), a banking group with an $18 billion market cap.

The group’s Banco de Credito de Peru is the country’s largest retail bank and the natural choice for many middle class and wealthy Peruvians. But the group is also active in tapping the needs of working-class Peruvians via microfinance leader Mibanco and has vast insurance and wealth management wings as well. You can think of Creditcorp as a one-stop shop for Peruvian finance.

As we were reminded in 2008, finance can be a volatile sector. But Creditcorp has managed to survive and thrive through booms and busts and everything in between. If you believe in the long-term Peruvian growth story, Creditcorp is your best option.

To continue reading, please see 7 Top Latin American Stocks to Buy.

Disclosures: No current position in any stock mentioned.


This article first appeared on Sizemore Insights as Investing In Latin America

An Ugly Surprise

I had an unpleasant surprise at the airport last week.

I walked into the TSA Pre line and handed the agent my boarding pass and ID. But rather than being greeted with the knowing wink and nod that comes with taking the VIP line, the agent dismissively pointed me in the direction of the general security line with the rest of the filthy hoi polloi.

Now, keep in mind, I travel frequently and have been TSA Pre approved for ages. So, the thought of – gasp! – taking off my shoes, removing my jacket and putting my laptop into one of the gray bins with the rest of the unwashed masses was absolute anathema to me.

How dare they!

I’m a little embarrassed by how poorly I handled this situation… and I’m probably lucky the TSA agent didn’t toss me out of the airport for the attitude I gave him. I was that guy… the one who throws an absolute fit over what was nothing more than a minor inconvenience.

And it was likely my fault. I made the reservation in a hurry, and it is likely I simply forgot to include my TSA Pre number, which is why the airline didn’t print it on my boarding pass.

I tell this story to make a point about expectations. It’s not that the general security line was that bad. It’s just that was expecting the VIP treatment in the TSA Pre line. And not getting what I expected was a letdown.

I fear that millions of Americans are due for dashed expectations as well… for something vastly more important than my travel comfort.


I wrote last week that Social Security – the bedrock of most Americans’ retirement plans – is starting to deplete its “trust fund.” Of course, there really is no trust fund. It was never more than accounting gimmickry.

The trust fund was invested in U.S. government bonds, which means that Uncle Sam was essentially borrowing from himself and calling it an asset. The larger problem is simply that Social Security is paying out more in benefits than it is taking in via tax revenues, which means the money has to be pulled from elsewhere in the budget.

In case you haven’t noticed, our government wasn’t able to balance its budget even when Social Security was running surpluses. Adding Social Security blows out the budget deficit all the worse.

The most likely “solution” is that Congress will move the goalpost by either raising the retirement age, raising taxes on benefits, or means-testing the benefits, effectively telling middle-class and wealthy Americans that they no longer qualify for the program.

None of these options are that bad.  But they are certainly going to fell that way because they are not at all what most Americans are expecting.

Let’s take this a step further and look at expectations for stock returns. Many – perhaps most – Americans are expecting stock returns to be 8% to 10% per year or better. Their retirement plans are built around those assumptions.

But what if those returns come in below expectations?

One of my favorite models for finding a “quick and dirty” estimate for stock returns over the next decade uses the cyclically-adjusted price/earnings ratio (“CAPE”). The CAPE compares current stock prices to an average of the past 10 years’ worth of earnings. Using a 10-year average smooths out the booms and busts of the business cycle and makes it easier to compare valuations over time.

Using the current CAPE value, you can estimate what stock returns will look like if valuations move back to their long-term averages.

Well, today stocks trade at a CAPE ratio of 32.5, which is more than 92% higher than the long-term average of 16.9.

Crunching the numbers, this implies that stock will actually lose 2% to 3% per year over the next decade. If you’re retirement plan depends on gains of 8% or better, that’s a big problem.



This article first appeared on Sizemore Insights as An Ugly Surprise

3 Things You Should Always Ask a Financial Adviser

The following first appeared on Kiplinger’s as 3 Things You Should Always Ask a Financial Adviser.

Your choice of financial adviser might be the single most important decision you ever make, short of your spouse or maybe your doctor.

While you might not be putting your life in his or her hands, per se, you’re certainly putting your financial future at risk. A good adviser can help you protect the savings you’ve spent a lifetime building, and – with good planning and maybe a little luck from a healthy stock market – grow it into a proper nest egg.

But how do you choose?

Let’s take a look at some traits you’ll want to look for, as well as three questions you’ll want to ask any prospective candidate.
What you want in a financial adviser

An older adviser with a little gray in their hair might instinctively seem safer, but ideally you don’t want an adviser that will kick the bucket before you do. However, going with a younger adviser introduces greater uncertainty as they will generally have a shorter track record.

Likewise, educational pedigree matters … but not as much as you might think. You can assume that an adviser with an Ivy League degree is highly intelligent and motivated, and those are qualities you want to see. But these same characteristics can make for lousy investment returns if they mean the adviser is overconfident. Investing is a game in which discipline, patience and humility generally matter more than raw brains and ambition.

As Warren Buffett famously said, “Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ.”

Yes, you want your adviser to be smart. But don’t be overly swayed by fancy degrees.

To finish reading the article, please see 3 Things You Should Always Ask a Financial Adviser.

This article first appeared on Sizemore Insights as 3 Things You Should Always Ask a Financial Adviser

Beware the Bangladeshi Butter Bias

Bangladeshi butter.

If you’re looking for the indicator with the highest correlation to the S&P 500, it’s not GDP growth or even earnings growth. No, it’s butter production in Bangladesh.

In a paper published two decades ago, mathematician David Leinweber and portfolio manager Dave Krider found that butter production in Bangladesh had the tightest correlation to the S&P 500 of any data series they could find.

Collectively with American cheese production and the Bangladeshi sheep population, this three-variable model “explained” 99% of the S&P 500’s movements.

Now, before you roll your eyes, Leinweber and Krider published the study in jest. These are geeky quants enjoying geeky quant humor. It’s precisely the kind of thing I would have done with my grad school buddies after a few pints at the Three Tuns in London. We would have gotten a good laugh out of this wild idea and then likely gotten a drink dumped on our heads after trying to ask for a girl’s phone number.

The problem is that a lot of traders aren’t smart enough to know it’s a joke.

In an article he wrote for Forbes a few years ago, Leinweber commented that 20 years later he still gets calls to his office asking for the latest Bangladeshi butter production figures.
Amazingly, it’s not just knuckle-dragging traders that fail to get the joke. Even professional researchers fall for it — some more than others.

Leinweber recounts a 2011 paper written by Tatu Westling, a professor at the University of Helsinki, that “explores the link between economic growth and penile length.”
Yes, you read that right.

According to Westling:

The average [GDP] growth rates from 1960 to 1985 are found to be negatively correlated with penile lengths: a unit centimetre increase in its physical dimension is found to reduce GDP growth by 5% to 7% between 1960 and 1985. Quite remarkable is the finding that male organ alone can explain 20% of the between-country variation in GDP growth rates between 1960 and 1985.

Regarding the relative importance of political institutions in shaping economic development, it seems that male organ is more strongly associated with GDP growth than country’s political regime type.

So, for every additional centimeter of manhood, GDP growth falls 5% to 7%.

As with all things in life, it appears there are trade-offs. If I have to choose between the two, perhaps wealth is overrated.

The author goes on to hypothesize that well-endowed men are inherently happier and more confident and thus don’t feel the need to work as hard, thus the lower level of economic development.
Apparently, the massive skyscrapers that penetrate the New York skyline really are a form of compensation.

Professor Westling very well might have written the paper in jest. I sincerely hope so.

But you don’t have to look far to see plenty of nearly equally ridiculous market indicators. The Super Bowl Indicator, the Hemline Indicator, head-and-shoulders patterns… I could go on all day. I’ll spare you a long explanation on overfitting, spurious correlations and data mining.

For crying out loud, I’ve spent the last half of a page making penis jokes, so getting overly technical at this point would be ridiculous.

But I can summarize it like this: If you can’t plausibly explain why a model works, then chances are good it’s a random coincidence.

There is absolutely no plausible reason why Bangladeshi butter production would predict S&P 500 returns and it’s hard to argue that average penile length determines GDP growth. (See what I did there?)

So, when looking at a model, ask yourself: Does it intuitively make sense?

As an example, I spent most of last year backtesting a stock trading model that combined several value investing metrics with momentum metrics.

The result was a portfolio strategy that delivered 43% backtested annual returns from 1999 to the present, utterly crushing the S&P 500.

Now, could this be an example of overfitting the data?

Maybe. But I don’t think so because the approach intuitively makes sense. Countless studies (most famously Fama and French’s 1993 study; click here to download it) have shown that value investing outperforms over time, and most of the famous investors throughout history, such as Warren Buffett and Benjamin Graham, were value investors.

Value investing works.

Meanwhile, various momentum and trend-following strategies have also been proven to outperform over time. So, it stands to reason that combining value and momentum would lead to solid results. I can’t guarantee that the future live results will live up to the backtest. You know the drill: Past performance is no guarantee of future results. But I’m betting it generates better returns than a Bangladeshi-butter-based market timing model.


This article first appeared on Sizemore Insights as Beware the Bangladeshi Butter Bias

The Lesson to Learn From Bobby Axelrod

I love the TV show Billions.

I always carve a little time from my work day on Monday afternoons to watch the episode from the night before while I’m doing paperwork at my desk.

When it airs live on Sunday nights, I’m usually worn out from a busy weekend of chasing my kids around, and I’m ready to crash.

So please, no spoilers. I haven’t seen last night’s episode yet!

In case you’re not familiar with the show, Billions tells the story of a complex cat-and-mouse game between a crooked hedge fund billionaire, Bobby Axelrod, and the equally crooked district attorney who’s out to get him, Chuck Rhodes.

It’s a brilliant show, and it’s surprisingly realistic. The writers clearly do their homework and legitimately speak the language of finance.

Perhaps I’m biased because Bobby Axelrod is played by Damian Lewis, a tall, lanky, redheaded actor who looks like he could be my older brother, but I usually root for Axelrod.

But at the end of last season, Axe found himself in a bind. He allowed Rhodes to get under his skin and ended up walking into a trap.

Spoiler Alert: Thinking he was burning Rhodes, Axelrod brutally sabotages the IPO of “Ice Juice,” a fictitious juice bar founded by Rhodes’ best friend, by planting a non-lethal toxin that makes the drinkers violently ill.

When news breaks showing Ice Juice customers vomiting on the floor, the IPO flops. Its investors are sunk.

Axelrod wiped out Rhodes’ trust fund, which was heavily invested in the IPO. But little did he realize that Rhodes had baited him in a complicated (and completely illegal) sting.

Rhodes intentionally let word get out that he was investing in the IPO, fully expecting Axelrod to try to blow it up.

It worked.

Axelrod couldn’t resist the opportunity to stick a knife in Rhodes and give it a good twist.

And the season ends with Axelrod sitting in a jail cell, with a gloating Rhodes lording over him.

Axelrod weasels out of jail this season, of course.

You can’t really have a show about the wheelings and dealings of high finance when the lead character is sitting in white-collar prison.

But his ego and lack of emotional control cost him dearly. His wife leaves him and takes their children, and his professional reputation is mud.

We can’t take much in the way of trading advice from Billions. If you tried to do half of what Axe and his cronies do in the show, you’d have federal agents in dark suits knocking on your door.

We can, however, walk away with some general principles.

This probably goes without saying, but it’s generally a bad idea to illegally manipulate a stock and force an IPO to fail.

But given that few of us have Bobby Axelrod’s money and power, that’s probably a moot point.

The bigger lesson – and one that’s applicable to us all – is this: When investing, don’t let your emotions get the best of you.

Axelrod let his hatred of Rhodes lead him to take a massive risk that nearly cost him his fortune and his freedom. But you don’t have to go to those extremes to get yourself into trouble.

How many times have you held on to a losing position because you “loved” the stock and got attached to it?

I can tell you that, over the years, I’ve done it more times than I care to remember. And nearly every time, I regretted it. My attachment to the stock cost me additional losses that I could have avoided by being more emotionally detached.

No matter how much you love a stock, it will never love you back.

A stock also couldn’t care less about your ego and whether you’ve wrapped your personal sense of worth into its performance. The stock is cold and impersonal, and that’s exactly how we need to approach investing.

But it’s not just the stocks you buy, it’s also the stocks you don’t buy.

I admit it. I hate Facebook (FB) on a primal, visceral level.

I hate the narcissistic culture it creates and that it prioritizes superficial online “friends” over the real flesh and blood variety. If I had a time machine, I would go back and kill in the company in its infancy.

Alas, I let my hatred of the company prevent me from buying the stock — to my detriment.

So, if you take one thing from Axe, make it this: Don’t let emotion get in the way.



This article first appeared on Sizemore Insights as The Lesson to Learn From Bobby Axelrod

MLPs That Should Crush the Market in 2018

The following is an excerpt from 5 MLPs That Should Crush the Market in 2018.

For a collection of companies that tend to own boring, cash flowing assets, it sure has been a wild ride in master limited partnerships.

On a total return basis (including dividends), the Alerian MLP Index — which is heavily weighted to the largest midstream oil & gas pipeline operators — doubled in value between the fourth quarter of 2010 and its all-time high in the fourth quarter of 2014.

Unfortunately, it all went downhill quickly. Encouraged by low interest rates and high energy prices, the pipeline companies borrowed heavily to finance their growth projects while distributing virtually all of their cash flow from operations as cash distributions. When crude oil started to tumble in 2015, the banks and bondholders got jittery and even some of the largest players found themselves effectively locked out of the capital markets.

Before it was over, the distribution growth that investors found so attractive went into reverse. Many MLPs froze their distributions and several actually had to slash them.

But those rough years helped to create the fantastic opportunity we have today. As a sector, MLPs got their leverage under control and started funding their growth projects with internally generated cash flow rather than new debt. This brings the sector more in line with “normal” public company behavior.

With firmer energy prices and more stable financing, MLPs are getting their growth mojo back, yet prices don’t fully reflect that reality, at least not yet.

So, today we’re going to take a look at five MLPs that I expect to deliver market-crushing total returns in the years ahead.

I’ve been a fan of Energy Transfer Equity LP (ETE) for a long time. In fact, it was my winning entry in InvestorPlace’s Best Stocks for 2016 contest.

Today, ETE is the linchpin in an energy infrastructure empire with over 71,000 miles of natural gas, natural gas liquids, crude oil and refined products pipelines.

Energy Transfer’s structure can be a little confusing to the uninitiated. Energy Transfer Equity is the general partner of two other MLPs: Energy Transfer Partners LP (ETP) and Sunoco LP (SUN), which distributes fuel to gas stations in over 30 states.

This complicated structure has become something of a liability to the company in an era in which investors demand more transparency. Furthermore, the company really hurt its reputation when it tried to buy Williams Companies (WMB) back in early 2016 … before changing its mind and resorting to questionable means to terminate the deal.

That’s OK. I like companies that have a little egg on their face, as we can often get them at a good price. Today, ETE is no exception. It yields a solid 7.2% and, after a short hiatus, started growing its distribution again last year.

To continue reading, please see 5 MLPs That Should Crush the Market in 2018.

Disclosures: Long ETE

This article first appeared on Sizemore Insights as MLPs That Should Crush the Market in 2018

Is Value Dead?

Value investing has historically been a winning strategy… but it’s been a rough couple of years.

So… is value dead? Should we all just buy the S&P 500 and be done?

The rumors of value’s death have been greatly exaggerated. Larry Swedroe wrote am excellent piece on the subject this month, Don’t Give Up On the Value Factor, and I’m going to publish a few excerpts below.

As the director of research for Buckingham Strategic Wealth and The BAM Alliance, I’ve been getting lots of questions about whether the value premium still exists. Today I’ll share my thoughts on that issue. I’ll begin by explaining why I have been receiving such inquiries.

Recency bias – the tendency to give too much weight to recent experience and ignore long-term historical evidence – underlies many common investor mistakes. It’s particularly dangerous because it causes investors to buy after periods of strong performance (when valuations are high and expected returns low) and sell after periods of poor performance (when valuations are low and expected returns high).

A great example of the recency problem involves the performance of value stocks (another good example would be the performance of emerging market stocks). Using factor data from Dimensional Fund Advisors (DFA), for the 10 years from 2007 through 2017, the value premium (the annual average difference in returns between value stocks and growth stocks) was -2.3%. Value stocks’ cumulative underperformance for the period was 23%. Results of this sort often lead to selling.

Charles here. Other than perhaps overconfidence, recency bias is probably the most dangerous cognitive bias for the vast majority of investors. Investors look at the recent past and draw the conclusion that this is “normal” and representative of what they should expect going forward. This is why otherwise sane people do crazy things like buy tech stocks in 1998, Florida homes in 2005 or Bitcoin in late 2017.

Investors who know their financial history understand that this type of what we might call “regime change” is to be expected. In fact, even though the value premium has been quite large and persistent over the long term, it’s been highly volatile. According to DFA data, the annual standard deviation of the premium, at 12.9%, is 2.6-times the size of the 4.8% annual premium itself (for the period 1927 through 2017).

As further evidence, the value premium has been negative in 37% of years since 1926. Even over five- and 10-year periods, it has been negative 22% and 14% of the time, respectively. Thus, periods of underperformance, such as the one we’ve seen recently, should not come as any surprise. Rather, they should be anticipated, because periods of underperformance occur in every risky asset class and factor. The only thing we don’t know is when they will pop up.



Well said.

After a period like the past ten years, it’s easy to draw the conclusion that value is dead. But investors drew the same conclusion in 1999… and they were dead wrong.

As a case in point, see Julian Robertson’s last letter to investors.



This article first appeared on Sizemore Insights as Is Value Dead?

High-Yield MLPs to Buy as Oil Prices Climb

The following is an excerpts from 7 High-Yield MLPs to Buy as Oil Prices Climb, originally published on Kiplinger’s.

After close of a decade of uninterrupted bull market, it’s hard to find many stocks that truly qualify as cheap today. But not everything is pricey – you can still find values if you know where to look. And oil and gas master limited partnerships (MLPs), as a sector, are a screaming buy at today’s prices.

A combination of low interest rates, a shrinking pool of available shares due to buybacks and mergers, and a general lack of investable alternatives have all conspired to create one of the most expensive markets history.

To put numbers to it, the Standard & Poor’s 500-stock index’s cyclically adjusted price-to-earnings ratio (“CAPE”), which compares a 10-year average of corporate earnings to today’s share prices, clocks in at 31. That’s late 1997 levels. Meanwhile, the S&P 500’s price-to-sales ratio recently hit 2.0, putting it on par with its levels in 2000 … at the peak of the greatest bubble in market history.

However, pipeline MLPs are looking inexpensive at the same time they’re exhibiting greater quality. After a couple difficult years in 2014 and 2015, MLPs have gotten their leverage under control and started funding their growth projects with internally generated cash flow rather than new debt.

“After several years of deleveraging and structural simplifications – which unfortunately came with distribution reductions in several cases – MLPs as an asset class are in the best financial health we’ve seen in a long time with an increased focus on per unit returns and self-funding capital expenditures,” explains John Musgrave, Co-Chief Investment Officer of Cushing Asset Management. ”And based on current price-to-DCF and EV-to-EBITDA multiples, MLPs are exceptionally cheap by the standards of the past 10 years.”

For a blue-chip MLP play, consider Enterprise Products Partners LP (EPD).

Enterprise Products is one of the oldest and best-respected MLPs you’re ever going to find. In an industry that has traditionally been run by cowboy capitalists, Enterprise has managed to stay remarkably level headed over the years and as reliable as Old Faithful.

Chase Robertson, Chairman of Houston, Texas-based RIA Robertson Wealth Management, says, “Enterprise Products Partners has been a core holding of our income portfolios for over a decade. It’s been a dependable workhorse for us, consistently raising its distribution like clockwork.”

Since going public in 1998, Enterprise has grown into one of the largest energy infrastructure companies in the world with approximately 50,000 miles of natural gas, natural gas liquids, crude oil and refined products pipelines and 260 million barrels of storage capacity.

Furthermore, Enterprise has eliminated the single biggest conflict of interest that has long plagued the MLP space: incentive distribution rights (IDRs). In a traditional IDR arrangement, the MLP’s general partner takes a disproportionate share of any distribution hikes to shareholders, which incentivizes them to bet the farm by raising distributions at an unsustainable pace. EPD and MMP eliminated IDRs years ago, which partly explains their more conservative profile.

Enterprise Products has raised its distribution every year since its 1998 IPO, and over the past decade, its annual distribution hikes have averaged just under 6%. At today’s prices, EPD shares yield 6.4%, which is exceptionally high by this MLP’s standards.

To finish reading the article, see 7 High-Yield MLPs to Buy as Oil Prices Climb.

Disclosures: Long EPD, ETE at time of writing.

This article first appeared on Sizemore Insights as High-Yield MLPs to Buy as Oil Prices Climb

Today on Straight Talk Money: All About Warren Buffett

I joined Peggy Tuck this morning on Straight Talk Money. Given that Berkshire Hathaway just had its annual meeting, we have Buffett on the brain. We discuss the Warren Buffett’s career and a few things you might not know about the Oracle.

Part 1:

Part 2:

Part 3:

Part 4:

This article first appeared on Sizemore Insights as Today on Straight Talk Money: All About Warren Buffett

Keeping Perspective: Julian Robertson’s Last Letter to Investors

Growth stocks — and specifically large-cap tech stocks led by the FAANGs — have utterly crushed value stocks of late. It’s been the dominant theme of the past five years. Even the first quarter of 2018, which saw Facebook engulfed in a privacy scandal, saw growth outperform value.

SectorBenchmarkQtr. Return
Large-Cap GrowthS&P 500 Growth1.58%
Large-Cap StocksS&P 500-1.22%
InternationalMSCI EAFE Index-2.19%
UtilitiesS&P 500 Utilities-3.30%
Large-Cap ValueS&P 500 Value-4.16%
Real Estate Investment TrustsS&P U.S. REIT Index-9.16%
Master Limited PartnershipsAlerian MLP Index-11.22

Value stocks in general underperformed, and the cheapest of the cheap — master limited partnerships — got utterly obliterated.

So, is value investing dead?

Before you start digging its grave, consider the experience of Julian Robertson, one of the greatest money managers in history and the godfather of the modern hedge fund industry. Robertson produced an amazing track record of 32% compounded annual returns for nearly two decades in the 1980s and 1990s, crushing the S&P 500 and virtually all of his competitors. But the late 1990s tech bubble tripped him up, and he had two disappointing years in 1998 and 1999.

Facing client redemptions, Robertson opted to shut down his fund altogether. His parting words to investors are telling.

The following is the Julian Robertson’s final letter to his investors, dated March 30, 2000, written as he was in the process of shutting down Tiger Management:

In May of 1980, Thorpe McKenzie and I started the Tiger funds with total capital of $8.8 million. Eighteen years later, the $8.8 million had grown to $21 billion, an increase of over 259,000 percent. Our compound rate of return to partners during this period after all fees was 31.7 percent. No one had a better record.

Since August of 1998, the Tiger funds have stumbled badly and Tiger investors have voted strongly with their pocketbooks, understandably so. During that period, Tiger investors withdrew some $7.7 billion of funds. The result of the demise of value investing and investor withdrawals has been financial erosion, stressful to us all. And there is no real indication that a quick end is in sight.

And what do I mean by, “there is no quick end in sight?” What is “end” the end of? “End” is the end of the bear market in value stocks. It is the recognition that equities with cash-on-cash returns of 15 to 25 percent, regardless of their short-term market performance, are great investments. “End” in this case means a beginning by investors overall to put aside momentum and potential short-term gain in highly speculative stocks to take the more assured, yet still historically high returns available in out-of-favor equities.

There is a lot of talk now about the New Economy (meaning Internet, technology and telecom). Certainly, the Internet is changing the world and the advances from biotechnology will be equally amazing. Technology and telecommunications bring us opportunities none of us have dreamed of.

“Avoid the Old Economy and invest in the New and forget about price,” proclaim the pundits. And in truth, that has been the way to invest over the last eighteen months.

As you have heard me say on many occasions, the key to Tiger’s success over the years has been a steady commitment to buying the best stocks and shorting the worst. In a rational environment, this strategy functions well. But in an irrational market, where earnings and price considerations take a back seat to mouse clicks and momentum, such logic, as we have learned, does not count for much.

The current technology, Internet and telecom craze, fueled by the performance desires of investors, money managers and even financial buyers, is unwittingly creating a Ponzi pyramid destined for collapse. The tragedy is, however, that the only way to generate short-term performance in the current environment is to buy these stocks. That makes the process self-perpetuating until the pyramid eventually collapses under its own excess. [Charles here. Sound familiar? Fear of trailing the benchmark has led managers to pile into the FAANGs.]

I have great faith though that, “this, too, will pass.” We have seen manic periods like this before and I remain confident that despite the current disfavor in which it is held, value investing remains the best course. There is just too much reward in certain mundane, Old Economy stocks to ignore. This is not the first time that value stocks have taken a licking. Many of the great value investors produced terrible returns from 1970 to 1975 and from 1980 to 1981 but then they came back in spades.

The difficulty is predicting when this change will occur and in this regard, I have no advantage. What I do know is that there is no point in subjecting our investors to risk in a market which I frankly do not understand. Consequently, after thorough consideration, I have decided to return all capital to our investors, effectively bringing down the curtain on the Tiger funds. We have already largely liquefied the portfolio and plan to return assets as outlined in the attached plan.

No one wishes more than I that I had taken this course earlier. Regardless, it has been an enjoyable and rewarding 20 years. The triumphs have by no means been totally diminished by the recent setbacks. Since inception, an investment in Tiger has grown 85-fold net of fees; more than three time the average of the S&P 500 and five-and-a-half times that of the Morgan Stanley Capital International World Index. The best part by far has been the opportunity to work closely with a unique cadre of co-workers and investors.

For every minute of it, the good times and the bad, the victories and the defeats, I speak for myself and a multitude of Tiger’s past and present who thank you from the bottom of our hearts.

Charles here. The more things change, the more they stay the same. Value will have its day in the sun again, and that day is likely here with the FAANGs finally starting to break down.

Had Robertson held on a little longer, he would have been vindicated and likely would have made a killing. Consider the outperformance of value over growth in the years between the tech bust and the Great Recession:


So, don’t abandon value investing just yet. If history is any guide, it’s set to leave growth in the dust.



This article first appeared on Sizemore Insights as Keeping Perspective: Julian Robertson’s Last Letter to Investors