Whitney Tilson’s latest monthly letter provides us with some insightful lessons for the current market environment. Regular readers will know that I believe there is no such thing as a one size fits all investment strategy or a holy grail approach. Instead, investors must understand the macro environment and apply the correct strategy to fit that particular environment. That micro approach could involve buy and hold, trading, value investing, etc. But the likelihood of success using one strategy in all environments is unlikely. The current turmoil and unusual asset class correlation is making for a very difficult environment for value investors. Tilson explains (thanks to Zero Hedge):
“Regarding the latter, it ’s been very frustrating to accurately predict the primary causes of the current market turmoil – the weak U.S. economy characterized by persistently high unemployment and a feeble housing market, plus the sovereign debt crisis in Europe – but to have done so a year too early (lest you think we are engaging in revisionist history, we’ve attached excerpts from our July 2010 and 2010 annual letter in an endnote at the end of this letter). As a result, we were positioned too defensively in late 2010 and our short book hurt our returns so much and grew so large that we were forced to trim it back and forswore making major market calls in the absence of high conviction of a major bubble. Thus, we were positioned normally – substantially net long – when the recent market storm hit.
So what are the lessons we’ve taken from our experience over the past year? That we’re much better bottoms-up stock and industry analysts than we are macro prognosticators. Making (and acting on) a bearish macro call a year ago was a mistake that we learned from and corrected earlier this year. In contrast, we do not think we made a mistake by failing to predict the latest market turmoil. Other than in rare circumstances, it’s just not what we do because we don’t think we’re good at it.”
As I’ve previously explained, one has to remain incredibly flexible given the unusual environment. This all begins with an understanding of the macro environment. We no longer live in a micro world. What happens in China and Europe impacts us all. And if you don’t understand what’s going on outside of the USA or your own backyard you’re taking excessive risks (perhaps without knowing it).
Value investing might not be dead (it’s certainly not dead for those who have the ability to implement it in the actual way that Warren Buffett implements it – no, not the “buy and hold” myth that Wall Street has sold to everyone), but we can be almost certain that it’s more important than ever to understand the macro. If there’s one great lesson to learn from the recent turmoil that should be it….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.