Sage Advice

Investment geniuses offer plenty of advice — But investment books do not hold the secret to beating the markets — Decoding sage advice is required to invest like the best.

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SAGE ADVICE

Investment geniuses make it look easy. After beating the markets, they produce reams of material explaining how they achieved their success. But investment books do not hold the secret to beating the markets.

After all, markets evolve and adapt. Any successful strategy is unlikely to work in perpetuity. Successful investors innovate, leveraging insights unknown to others to generate their results.

In addition, successful investment strategies often capitalize on niche inefficiencies that are difficult to scale, operate in opaque, inaccessible markets, or rely on hard-to-understand investment structures.

While reading the wisdom of investment sages is always enjoyable, attempting to decode their advice often reveals irreplicable strategies.

Mastering The (Niche) Market Cycle

Howard Marks has generously shared his investment writings for decades. His book, “Mastering The Market Cycle,” is an excellent read as are his widely distributed letters.

But the success of Marks’s firm, Oaktree Capital, has little to do with the market cycle. Instead, Marks was early in discovering the distressed debt market and the attractive returns available in this space.

When Marks founded Oaktree in 1995, he capitalized on a small, illiquid market with few competitors. At the time, the distressed debt market was only $64 billion.¹ Today Oaktree manages over $180 billion; at this scale, beating the markets will actually require timing the cycle as opposed to capturing niche alpha.

A more accurate book on Marks’s success may have focused on identifying small, illiquid, uncompetitive markets, and participating in these markets with long-term client capital.

You Can Be A (Leveraged) Stock Market Genius

Joel Greenblatt’s incredibly successful Gotham Partners achieved one of the greatest hedge fund track records of all time, returning over 50% per year from 1985-1994.² After delivering these results, Greenblatt has published a number of entertaining and accessible investment books.

Active investors can review any of Greenblatt’s books during times of underperformance for a reminder that properly implemented value investing wins in the long run.

“You Can Be A Stock Market Genius” has inspired a generation of investors. Greenblatt’s “Magic Formula” offers a simple but extremely powerful method for at-home value investors. Unfortunately, winning a Powerball jackpot is more likely than earning 50% per year in a diversified portfolio of stocks.

In addition, while Greenblatt’s writings are eminently enjoyable, they tend to skip the key feature in delivering mind-boggling returns. Gotham Partners invested heavily in options to generate their track record. Embedded in these options was a massive amount of financial leverage.

Greenblatt, properly, steers clear of advising the average investor to leverage their portfolio. But in doing so, he in no way shares the true story behind his success.

The Education of a (Family Office) Value Investor

Guy Spier’s value investing journey gives hope to the hopeless, namely public market investors crazy enough to start their own funds. With active management generally in decline, few fund managers are able to successfully scale their businesses. Guy Spier is an exception to the rule.

In his “Education of a Value Investor,” Spier experiences “a series of transformations and self-realizations” that “lead him from an investment banking job with a third-rate firm to managing his own fund.” Spier recounts his formative readings and meetings, including his famous $650,100 lunch with Warren Buffett.

A key part of Spier’s ability to set up his own fund was a $15 million investment from his father in 1997. In today’s dollars this would be over $30 million, enough for a fund to be profitable from day one. 

A key ingredient to having the freedom to read about value investing, build a lengthy track record, and spend over half a million dollars to meet Warren Buffett seems to be managing a family office. It would behoove emerging managers to overlook this advantage while dreaming about earning a living in the industry!

Sage Advice Nevertheless

No story is ever perfect, and no investment strategy is replicable for every investor.  The three authors mentioned above have graciously shared their stories, influenced a generation of investors, and constantly serve as a reminder that value investing is not completely dead.

Although we have highlighted the inability of an average investor to replicate the success of Howard Marks, Joel Greenblatt, and Guy Spier, it does not mean we aren’t grateful for their contributions.

1 NYU

2 Hedge Fund Journal