July 2021 IssueLong scroll reading

Summer Solstice

By Edward A. Studzinski

“The predicament
You find yourself in,
Is not as dire,
As you imagine
The door you
Think is closed,
Is an illusion,
Self-imposed …”

By J.P. Niemeyer, 5/21/2021

One of the things I would suggest to people is that they broaden their horizons with regards to the things they read about the investing world, managers, and strategies. A publication I would heartily recommend is the Graham and Doddsville Newsletter put out several times a year by the students in the Graham and Dodd program in the graduate school of business at Columbia University. Each issue usually has several interviews that are in-depth, often running fourteen or fifteen pages of small print. The interviews usually cover the history, investment philosophy, and implementation of a portfolio manager or firm. You will get a much better feeling from them about an individual money manager than you will from the usual quarterly letter or marketing material that has been carefully pre-scripted and curated by a firm’s publication relations or marketing department.

In a recent edition, there was an interview with Dan Rasmussen of Verdad Advisers (Spring 2021), who started his career at Bain Capital. One of the things he said that brought me up short was that at Bain they spent a lot of time developing growth forecasts for the companies they were investing in. He said that when he looked at the predictive power of the forecasts if Bain had just said 3% was an appropriate growth rate for every portfolio company, they would have been 20% more accurate than their internal forecasts. This begged the question as to what can really be known as a fundamental investment analyst.

“I found was that the price paid seemed to overwhelm all the other diligence items. Competitive advantage was often a transient thing. If a company seemed competitively advantaged in 2010, by 2015 it wasn’t competitively advantaged anymore. In contrast, the price paid was predictive because it was one of the key variables determining how much money you made.” Dan Rasmussen, 4/16/2021

Rasmussen considers growth projections to be a trap that sucks up a lot of time and energy. The result is Excel spreadsheet models with little predictive power. Indeed, he would argue that the models end up having negative predictive power, as they often are trend extrapolated, especially if the company has been doing well. Rasmussen would argue that thinking about reinvestment opportunities and their returns put you in a better place investment decision-wise. Return on assets and credit quality really matter when it comes to determining valuation. At the end of the day, valuation is what really matters.

I commend the article to you, as it will give you a better frame of reference to assess what you see and hear from other investment presentations.  You will often find in the back issues a more detailed set of interviews and comments from managers than what you have generally seen and heard from them in other places. All in all, it is a great resource.

One final FYI – for those who have been curious about my interest over the years in the closed-end fund, Central Securities Company, there is a twelve-page interview with Wilmot Kidd and John Hill from there starting on page 44 of the Winter 2021 issue of the Graham and Doddsville Newsletter.  

The Iceberg

David mentioned to me that there are a lot of profiles this month. Many of them seem to be of managers jumping ship and moving on to other organizations. They start a similar product to the one they managed, but with different fees (and perhaps different loyalties up the ladder). There has been for the last several years a shift from active management to passive and exchange traded funds that has placed a considerable amount of financial pressure on firms, especially firms that are investment manager roll-ups. I will not say that the model no longer works. I will say that the revenue and expense sharing terms are shifting. Much of what is going on is invisible to the clients until it is not.

In London, one firm that had a reputation for a tremendous amount of intellectual investment capital (which produced superior returns) lost one of its founding partners to a disagreement and the other two are allegedly not involved in the day-to-day running of investments. That firm had had two partners running one of the best-known Buffet-like partnerships (with similar returns). They withdrew and ultimately shut down their partnership, primarily because the regulatory burdens imposed by securities regulators were geared to catching the bad actors, with no reward or credit to the good actors. A well-known hedge fund manager in Chicago shifted operations to Florida during the pandemic. It remains to be seen whether those operations will return to Chicago. As mentioned in a previous month, a firm that was running money for Affiliated had those funds pulled, resulting in a shutdown. Another firm is dealing with the questions of generational shift as its two chief investment officers spend much of their time in Florida or Michigan. The pandemic taught us that there is a lot that can be done remotely. But the creative bursts and cross-pollination of ideas that comes from having everyone in an office together for a majority of the time cannot be easily dismissed.


I used to think that small firms, those with one or two investment products or funds, had an advantage over the big fund complexes such as Blackrock, Fidelity, and Price. They could avoid the dilution of their investment efforts by having a limited number of products, allowing a laser-like focus on the investment strategy and implementation thereof. I am increasingly questioning that. I wonder what the right size is for a firm (similar to I think the questions that a lot of community banks face these days when Bank of America says it is spending a billion dollars a year on cybersecurity). I have not yet reached a conclusion. But I am weighing what things are important for sustainability. How do you achieve consistent recruitment AND retention of like-minded talent? Low or no turnover of key investment personnel often dictates success for the firm and for clients (you will find out what someone contributed to the process after they have left). The genesis for this questioning is an article that appeared last week in The Financial Times of London, discussing Baillie Gifford of Edinburgh, one of the few (and largest) true partnerships, with the partners having absolute legal liability. One of the striking things about that firm is that they have consistently recruited the same type of people – intellectually curious and students of history, literature, or the classics. No cookie-cutter finance degrees there. It will be interesting to see in five years whether they or some other kind of organization will stand the test of time.

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About Edward A. Studzinski

Ed Studzinski has more than 30 years of institutional investment experience. He was a partner at Harris Associates in Chicago, Illinois. Harris is known for its value-oriented, bottom-up investment approach that frames the investment process as owning a piece of the business relative to the business value of the whole, ideally forever. At Harris, Ed was co-manager of the Oakmark Equity & Income Fund (OAKBX). During the nearly twelve years that he was in that role, the fund in 2006 won the Lipper Award in the balanced category for "Best Fund Over Five Years." Additionally, in 2011 the fund won the Lipper Award in the mixed-asset allocation moderate funds category as "Best Fund Over Ten Years. Concurrently Ed was also an equity research analyst, providing many of the ideas that contributed to the fund’s success. He has specialist knowledge in the defense, property-casualty insurance, and real estate industries, having followed and owned companies as diverse as Catellus Development, General Dynamics, Legacy Hotels, L-3, PartnerRe, Progressive Insurance, Renaissance Reinsurance, Rockwell Collins, SAFECO, St. Joe Corporation, Teledyne, and Textron. Before joining Harris Associates, over a period of more than 10 years, Ed was the Chief Investment Officer at the Mercantile National Bank of Indiana, and also served on their Executive and Asset-Liability Committees. Prior to Mercantile, Ed practiced law. A native of Peabody, Massachusetts, he received his A.B. in history (magna cum laude) from Boston College, where he was a Scholar of the College. He has a J.D. from Duke University and an M.B.A. in marketing and finance, as well as a Professional Accounting Program Certificate, from Northwestern University. Ed has earned the Chartered Financial Analyst credential. Ed belongs to the Investment Analyst Societies of Boston, Chicago, and New York City. He is admitted to the Bar in the District of Columbia, Illinois, and North Carolina.