This week I am highlighting an interview and a related book for you. I wanted to go ahead and get it out since it is almost 5:00 p.m. on Friday afternoon and I was afraid someone might read this post if I published at any other time.
Davis Bloomberg Interview – Marks Memo
First, I want to share an interview with Chris Davis of the Davis Funds and his appearance on ETF IQ on Bloomberg TV. Bloomberg.com is behind a paywall now, but you can access a certain number of articles/content per month (I think it is 9).
So, they are talking about Howard Marks’ most recent memo. Here’s a link to the page where you can sign up for his memos and find the archived ones. Marks also wrote a great book, The Most Important Thing. It is kind of a compendium of his memoranda with some additional commentary (illumination) added for the book. It is a good read.
I was not a big fan of this most recent memo, wherein he sort of continues an ongoing debate about active versus passive versus algorithms and ETFs. I personally don’t get all these people saying that ETFs haven’t been tested or will exacerbate liquidity problems.
It is not like the stock exchange hasn’t been forced to close before…for days. During times of crisis liquidity is going to vanish. It doesn’t really matter if you’re talking about a money market mutual fund, or a traditional mutual fund or a limited partnership. Well it might matter, but really the liquidity in the underlying securities or whatever is what is going to determine if the wrapper can trade. Look at Third Avenue. Real estate ain’t always that liquid. Yeah, junk bond’s will probably lock up at some point and so will the ETFs. Either that or they will trade at discounts, just like CEFs. I would personally rather be able to see the orders and use limits versus mandating a redemption from a traditional mutual fund at whatever NAV is at 4:00 pm.
In sum, there are bad ETFs but there are also tons of bad CEFs and traditional mutual funds and those structures are generally more opaque and tax inefficient.
Back to Davis, he seems to be a good investor and kind of sticks to his wheelhouse, and that of his family as detailed in The Davis Dynasty, financials. He has launched some ETFs which basically replicate the strategies in his old school mutual funds. They are sort of unique in that they are “active” human stock picker funds. I like that he isn’t seemingly hiding behind the transparency as a reason not to use open funds. He’s like c’mon we’re not dealing in small caps and we’re not trading that often so who cares if you know what we own daily.
He then kind of talks his book with an attempted defense of human active stock pickers. Marks also talked about this and I don’t know it seems they are conflating like systematic active with passive and just really saying “stay off my lawn.” They both have good records, but I am unpersuaded. I much prefer a systematic approach if I’m going to outsource investing. You just never know if someone is going to go all Valeant or SHLD on you. Or get a divorce or struggle with tons of money to manage or just drift into buying NFLX at the top like Druckenmiller and Julian Robertson kind of did in the 1990s.
Those are two of the all time greats and they drifted. I would rather make those mistakes myself for no fee, thanks.
So basically, I found the interview unpersuasive on the point that humans are better and ETFs are the devil. I especially question his claim that the average international stock manager beats the index (recent LSV papers aside). I seriously doubt this unless his data has survivorship bias and/or excludes individuals.
Davis does talk about some distortions caused by indexes in individual stocks and the flows that follow them. Interestingly, Davis mentions a spin-off from a company he owns that has been jettisoned from all the indexes. He says it is now trading at “4 times earnings.” Any ideas what he’s talking about? If so, please share your insights in the comments section. The only stock I can think of that might fit this is BHF. It’s trading around 4x management’s guided earnings. But I don’t see it (or MET) in his portfolio.
Media About…Media
The second thing I wanted to highlight is an article in the WSJ about Shari Redstone: Shari Redstone’s Path to Power. It is sort of interesting, and I’m watching this space. You know a bunch of these media stocks, including FOXA kept showing up on the magic formula and similar screens. I think VIAB and CBS are still showing up on there (along with AMC).
The article is a bit of an advertisement for a new book about the Sumner Redstone and his empire:
I think I might pick this up as background reading on the sector/CBS and Viacom. It seems like they have some really good I.P. but it also seems like Viacom has been run into the ground and Shari didn’t waste much time in pissing off Les Moonves who cleary has been whooping some ass, with what was viewed as an inferior hand back when they split the companies up.
The whole situation seems kind of screwed up. Maybe Brian Roberts can roll them up if he’s gets dissed by Fox. Maybe the best play is whomever gets all these businesses that DIS and other acquirers are going to be forced to sell to meet antitrust requirements. See Buying What No One is Selling
Munger had some interesting comments about Sumner Redstone at the DJCO meeting (I think) last year. Basically, what is the point if you end up on a feeding tube with two women robbing you blind and your kids hating you while your media empire turns to crap?
I still might check out Redstone’s autobiography, A Passion to Win for some more perspective. I am not a fan of what was done with Viacom, but maybe I am just bitter that they split the rights to Star Trek, screwing it up for building multimedia franchises, licensing, and maybe even theme parks attractions. C’mon, with Bezos and Musk trying to commercialize space Star Trek should be front and center in modern culture!
Ok, so now that I’ve soundly critiqued three (near) billionaires, I should probably wrap up.
TL;DR
To recap: a meh memo from Marks, led to a pretty decent discussion with Chris Davis. I think both are kind of talking their book (well, Marks is right that ETFs probably won’t take over in distressed debt investing, where he does his thang) and maybe mixing up some issues. They were also heavy and narrative and lacking data/evidence. Davis did mention a potential interesting special situation/spin so let’s try and figure out what he’s talking about. I’m thinking maybe BHF but don’t see it in his portfolio (so far).
In this media curation post, I also highlighted an article, promoting a book, about a media “empire” which has fallen on some hard times. There could be an opportunity there. The space is cheap and active, thanks largely to “new era,” Netflix thinking. The space has been popping up on magic formula and similar screeners for a while (See, e.g. RocketFinancial & AlphaArchitect). So, we found a couple of books to read to try and learn more about the space and one potential opportunity.
Have a nice weekend and thanks for your support of the advertisers and for using the affiliate links to buy stuff.
Back to the baby and the Berkshire Hathaway archives for me.