The Wall Street Journal published an interesting OpEd piece by Mark Spitznagle today. It described Benjamin Bernanke and Benjamin Graham’s conflicting views of markets.
Two disparate views of markets represent well the range of opinion among U.S. stock market participants today. One is a devout faith in market efficiency and the supremacy of market pricing as a reflection and forecast of fundamental value. The other expects errors and biases in market pricing. The first should be recognizable as belonging to Ben Bernanke (easily the biggest trader and most significant market manipulator in history); the other to Ben Graham, the father of value investing. With which Benjamin do you agree?
…Imagine a world where the stock market is open for trading only one hour of every year…
…If this would change how you invest, then apparently a steady stream of market quotations is a sine qua non of your investment process; a trade makes sense to you when validated and quickly rewarded by the constant transactional opinions of your friends in the marketplace. You are a Benjamin Bernanke trader.
However, if you would maintain the same investment approach as always, then your investment decisions must be based on your expectation of the cash flows to be received from those investments, irrespective of what subsequent market quotations have to say about them. You don’t care what your friends think (and you probably don’t have many of them anyway) [This hurts, but it's true]. You are a Benjamin Graham investor.
To the Bernanke trader, market prices are the most information-laden depiction and forecast of the state of the world. They are neither dear nor cheap—they just are. Thus statements such as “price increases largely reflect strong economic fundamentals” (Mr. Bernanke’s take on house prices in 2005).
But the wisdom of the crowd turns tragically biased when opinions are interdependent. And amplification and contagion of opinion is what markets do so well through continuous Bernanke trader herding. The Graham investors recognize this, as well as the difficulty for anyone—especially economists and analysts—to accurately predict changes in macro variables or returns on corporate investment. They treat the implicit forecasts embedded in market valuations as folly. Markets get dear and cheap, and it’s pretty obvious when they do.
So, true. The markets are dear right now given much of the evidence presented here: http://amarginofsafety.com/2011/03/08/tobins-q-ratio-and-shillers-price-to-trailing-10-year-earnings-ratio/ I find it interesting that in the remainder of the OpEd Spitznagle points to one of the metrics that I did in the latter blogpost to demonstrate the current dearness of the market.
The problem for nascent fund managers who stay true to their value-investing philosophy and maintain discipline is discussed here:
Ben Bernanke traders do often rule the roost–and for years…Today’s stock market is a case in point. Bernanke and his traders are stampeding…Graham investors have stoically stepped aside.
Or, to paraphrase John Maynard Keynes, “The market can remain irrational longer than a disciplined fund manager can stay in business.”
A nascent manager is given little time to prove himself. As discussed here http://amarginofsafety.com/2011/03/08/santangels-review/ David Einhorn can thank a fast start out of the gate for his ability to attract capital. A fund manager who does those things necessary to protect his investors’ capital while the market flies unsustainably into the stratosphere–and stays there for years–has little chance to attract capital. Despite doing the right thing, he will not remain in business.
