Seeing the Blankfein piece in the FT against Mark-to-Market vs. Wesbury is the dichotomy of the market place. Those who believe in Efficient Market Hypothesis believe that price trend represent all the information available for a particular security. Mark-to-Market is valid in all environments for traders, technical and momentum investors. Efficient Market players have investment horizons from minutes to months. If they hold longer than a year, it is only due to a series of short term technical signals that reinforced holding.
The “Value Investors” on the other hand look for mispricing vs. fundamentals, i.e. discount to Book Value, Cash Flow or some other value parameter that is measurable and quantifiable. Warren Buffett is the prime example of Value Investing, the best known, but there are numerous others. However, the number of true “Value Investors” is far less than all other investors. Value investors investigate, analyze and parse a target company’s business till they are comfortable with the decision to commit funds at a level at which they feel an anticipated rate of return is likely to be had over a multi year period. It is not unknown for Value investors to hire investigators and analysts to look at each business site of a company’s operation, individual tax filings, competitors and vendor information in an effort to sleuth the locations of all values within a company. Value investors have an investment horizon that is typically greater than 5yrs.
Mark-to-Market accounting during down markets provides opportunities for Value investors. Their records are well known. There are no traders famous for their investment judgment over the same period of any well known value player.
Importantly, mixing Value investors and Efficient Market players (calling them investors is an abomination of the word) in the same room is like watching two vastly different cultures trying to communicate. They can’t. They are so culturally different that the terms, “value”, “return”, “analysis” which stand for defining action and criteria for one have no equal meaning in the other. What is even more bazaar is that in most instances they do not understand why they don’t understand each other as they each believe they are perfectly correct in their views of assessing investment opportunities.
I am a Value investor. There are truly very few of us vs. other investors. My guess is less than 2%.
Mark-to-Market accounting is an abomination of reasoning during periods of market disruption such as we just experienced when the SEC banned short selling. Unfortunately, there are more of them than us, but fortunately the market will and is currently righting itself even with the mistakes we have made and continue to make. Philosophically we need the majority of investors to not get it right so that us few can take advantage of the deep discounts not produced in any other way.
All will be well even if the current stimulus package is passed. It may just take longer.
Disclosure (“none” means no position):
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2 replies on “"Davidson" on Blankfein vs Westbury”
MORGAN STANLEY AND CITIGROUP TO MERGE SOON.
What a coincidence Citi has done a joint venture to sell its brokerage unit to Morgan Stanley.
Is that why Carlos Slim bought all those shares of Citigroup post and pre the infusion.
Semantics issue, but isn’t Blankfein arguing for m2m? Quote: “For Goldman Sachs, the daily marking of positions to current market prices was a key contributor to our decision to reduce risk relatively early in markets and in instruments that were deteriorating. This process can be difficult, and sometimes painful, but I believe it is a discipline that should define financial institutions.”
Essentially, what I think Blankfein argues is that we(anyone in the markets) should not give into the bad habits of “let[ing] our ability to innovate exceed our capacity to manage.” In other words do the hard work for ourselves and not finding shortcuts.
And that’s precisely why I like Value as opposed to anything else. It requires hard work. Look at any one of the value guys. They are the best because they put in the work that is necessary to be the best. Sure they get in trouble but I’d be willing to bet that the places they get in trouble are when their discipline is…not par.
Sh*t, that’s what this game is about. Discipline. No different than any great person on the top of their field. Problem with Finance is that it attracts a lot of undisciplined people. Easy come. Easy go.