“Those who can not remember the past are condemned to repeat it.” – George Santayana
On Mar 30, 2000 One of the stalwart of value investing Julian H. Robertson Jr. hung up his boots & closed down his seven funds. It was due to the underperformance of his funds over last 18 months, when the funds lost 4% in 1998 followed by a decline of 19% in 1999. By the March 2000 his fund were down another 13.5%. In contrast to his funds, the Technology heavy index Nasdaq was rising rapidly, His investors started to pull out money and roughly $7.7bn was withdrawn.
Investing Pandit’s & News houses didn’t let go the chance to write the headlines about the incident. Some of the headlines to help you give the better picture of reality:
“There is an old adage, Don’t fight the markets. Julian did and lost” – Washington Post
“The financial markets humble ordinary investors all the time. In Julian H. Robertson Jr., they have humbled an investing giant.” – The New York Times
Julian was not alone to face this criticism, Other value investors like the legend himself Warren Buffet was also under attack. Value investors were touted as the old economy investors. Those who don’t know Julian Robertson, He is one of the most consistent billionaire for last two decades currently at the age of 88 with a net worth of $4.3bn (Forbes link). He had founded the hedge funds “Tiger Management” in 1980 and for the first 18 years $10k invested in his fund would have turned into ~2.6mm with a CAGR of 32% net of fees, This by any yardstick was phenomenal performance. In his letter to investors, he gave the warning as below:
“The current technology, internet & 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 un-till the pyramid eventually collapse under its own excess.“
What happened next is a historical dot com bubble burst during early 2000. From the peak of Mar 2000 by Mar 2002, Nasdaq saw a correction of more than 70% & Index had fallen to the level last seen in 1995. Seven years of investing with zero returns! Even with the touting from so called new generation money managers, he did not give up his investing principle. He rather thought it to be best to close his funds, return the money of investors. He didn’t quit the game of investing just the responsibility to manage other people’s money. He explained his reason to investors as well:
“The people who were cynical and jumped in and played this boom are going to win this game. But to take the cynical risk against your fundamental belief, I wonder if in the long run that will work.”
He also shared his wisdom about the reason behind his success & the challenges:
“The key to Tiger’s success over the years has been a steady commitment to buy 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.”
These words to me reminded a lot about the current market scenario. In absence of actual earnings, the thing fueling the current rally is the high expectation of future growth coupled with liquidity. I do not know the future and not sure what would be the outcome but as an ardent follower of value investing approach, The probability of further upside is not sufficient for me to take the plunge even if I have to sit out of the rally. My only sane advise would be to repeat the warning, Don’t be the last Fo-Mo buyer!