Q & A With The Legendary Lou Simpson

 

Dear Superinvestor Bulletin Follower,

For years he was the only investor that Warren Buffett would trust to manage his money.

He is Lou Simpson….

Kellogg School of Management At Northwestern just interviewed Mr. Simpson

Bob Korajczyk: What would you say is the essence of your investment philosophy?

Lou Simpson: The essence is simplicity. The base case for investing in any area of the market is a passive product, such as an index fund. That’s something any investor can access.

If you’re a professional investor, the question is: How can you add value? The more you trade, the harder it is to add value because you’re absorbing a lot of transaction costs, not to mention taxes.

What we do is run a long-time-horizon portfolio comprised of ten to fifteen stocks. Most of them are U.S.-based, and they all have similar characteristics. Basically, they’re good businesses. They have a high return on capital, consistently good returns, and they’re run by leaders who want to create long-term value for shareholders while also treating their stakeholders right.

Korajczyk: So you concentrate your investments in your very best ideas.

Simpson: You can only know so many companies. If you’re managing 50 or 100 positions, the chances that you can add value are much, much lower.

So far, this year we bought one new position, and we’re looking pretty seriously at one more. I don’t know what we’ll decide to do. Our turnover is 15, 20 percent. Usually we add one or two things and get rid of one or two things.

Warren [Buffett] used to say you should think of investing as somebody giving you a fare card with 20 punches. Each time you make a change, punch a hole in the card. Once you have made your twentieth change, you have to stick with what you own. The point is just to be very careful with each decision you make. The more decisions you make, the higher the chances are that you will make a poor decision.

One thing a lot of investors do is they cut their flowers and water their weeds. They sell their winners and keep their losers, hoping the losers will come back even. Generally, it’s more effective to cut your weeds and water your flowers. Sell the things that didn’t work out, and let the things that are working out run.

Follow the link for the entire interview:

“One of the Investment Greats” Explains His Portfolio Strategy

About The Superinvestor Bulletin Portfolio

Every idea that goes into the portfolio of my subscription service is a high conviction idea from one of the best investors in the world.  As a group these investors have significantly outperformed the overall market for decades.

If I build a portfolio made up of ideas from a group of investors who generate 15 to 20 percent annualized returns shouldn’t my performance match the group?

No…it should actually do better since I don’t pay their performance and management fees which nick up to 5 percent from their returns.

I present the best idea I can find in their portfolios every month.  In the year and a half my service has been running we have vastly outperformed the market.  Not because I’m smart, but because the people whose ideas I steal are very, very smart.

Come take a free trial and see why my results are so good so far:

Seeking Alpha Author Research

Your portfolio will thank you for it.

Reese Morgan

Editor, The Superinvestor Bulletin

 

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Doubleline Shows Best Sector Valuation With Relative CAPE

 

Dear Superinvestor Bulletin Follower,

What is the Relative CAPE?

It is a simple formula from Doubleline which is used to determine which sectors are most attractively valued.

Here is the formula:

Current Sector CAPE Ratio / 20 Year Rolling Average Sector CAPE Ratio

The larger the number the less attractive the sector valuation is relative to the 20 year rolling average.

Here is what Doubleline’s measure shows today:

About The Superinvestor Bulletin Portfolio

Every idea that goes into the portfolio of my subscription service is a high conviction idea from one of the best investors in the world.  As a group these investors have significantly outperformed the overall market for decades.

If I build a portfolio made up of ideas from a group of investors who generate 15 to 20 percent annualized returns shouldn’t my performance match the group?

No…it should actually do better since I don’t pay their performance and management fees which nick up to 5 percent from their returns.

I present the best idea I can find in their portfolios every month.  In the year and a half my service has been running we have vastly outperformed the market.  Not because I’m smart, but because the people whose ideas I steal are very, very smart.

Come take a free trial and see why my results are so good so far:

Seeking Alpha Author Research

Your portfolio will thank you for it.

Reese Morgan

Editor, The Superinvestor Bulletin

 

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Notes From Bill Miller Value Partners Q3 Investor Call

 

Dear Superinvestor Bulletin Follower,

Notes below from Bill Miller’s Q3 investor conference call.

We’re still in a bull market that we think has several more years to run.

Bull markets typically end one of two ways:

Economic slowdown which turns into a recession – the market will begin to price in the declining growth rate and the decline of earnings
The investment alternatives become compelling relative to stocks, which we currently don’t see with bonds.

A Fed governor commented that with bond yields north of 4% on the 10-year (currently they are at ~2.4%) and the Fed’s Fund rate rise to 2%-2 1/2%, we would achieve “normalization”. If that happens, we think stocks would likely be 20% higher/have a P/E around 21 -22 – then the earnings yield would be not far from the bond yield. We think that’s still a couple years out.

Year-to-date, we’ve had the lowest volatility in market history. October, which historically has the highest volatility of any month in the market will set the record not just for low volatility in October, but low volatility in any single month in market history.

French mathematician Benoit Mandelbrot demonstrated fairly conclusively that volatility doesn’t tend to mean revert. It tends to cluster – low volatility tends to beget low volatility until something knocks it off the perch. I think it wouldn’t take much to push volatility a little higher.

We haven’t had a 3% correction in almost close to a year of market days, which is unprecedentedly low. I wouldn’t be too concerned if we do get a 3% or 4% or 5% correction in the market.

Biggest potential issue is exogenous, an unpredictable geopolitical event or problem that disrupts markets.

We think it’s reasonable to expect that over the next 12 or so months, the market will be up in line with earnings growth, which is supposed to be 6-8% next year.

Passive investing – what kind of impact has the rise in passive investing had on the market’s rise or in our process?
A lot of speculation about the risks, but no good evidence of the impact passive investing may have on the markets
During the rise of the internet and telecom stocks in the late 1990s, the trend of money flowing out of value funds and into funds that owned the internet stocks was powerful, prices stayed high. This was proven to be unsustainable.

Michael Goldstein’s (Empirical) work has shown that the ETFs which are the most popular and get the most money in any given quarter or six months typically do poorly after that. This seems counterintuitive, but is true as people tend to buy high and sell low.
One of the issues is what level of passive might begin to impact the market such that the values would significantly diverge from fundamental values and there wouldn’t be enough of active managers to bring it back in. I think that’s a long way off.

The way in which price discovery is most effective has nothing really to do with passive versus active. A diverse group of investors with different strategies, different time horizons and different methodologies will lead to more efficient pricing in the long run.
Currently, we don’t see any glaring pockets of mispricing by market cap – it’s company-by company.


About The Superinvestor Bulletin Portfolio

Every idea that goes into the portfolio of my subscription service is a high conviction idea from one of the best investors in the world. As a group these investors have significantly outperformed the overall market for decades.

If I build a portfolio made up of ideas from a group of investors who generate 15 to 20 percent annualized returns shouldn’t my performance match the group?

No…it should actually do better since I don’t pay their performance and management fees which nick up to 5 percent from their returns.

I present the best idea I can find in their portfolios every month. In the year and a half my service has been running we have vastly outperformed the market. Not because I’m smart, but because the people whose ideas I steal are very, very smart.

Come take a free trial and see why my results are so good so far:

https://seekingalpha.com/author/superinvestor-bulletin/research

Your portfolio will thank you for it.

Reese Morgan

Editor, The Superinvestor Bulletin

 

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