#thomas russo

[pier-carlo-universe]

L’INCONTRO, di Thomas Russo

L’INCONTRO, di Thomas Russo

di Thomas Russo

L’INCONTRO

Ho incontrato la luna e le stelle, mi hanno invitato a ballare Per un momento tutti i miei problemi riesco a dimenticare Ho incontrato il sole che mi accoglie con i suoi grandi raggi E con il suo calore irradia città, campagne e i loro paesaggi Ho incontrato la pioggia che con il suo battito così intenso Scende con forza, mi fa compagnia mentre sono qua che penso Ho…

View On WordPress

[frankluengo]

The Hardest Part Of Investing Is Emotion

Yesterday I had the opportunity to attend a lecture given by Thomas Russo, a renowned value investor and partner of Gardner Russo & Gardner. Mr. Russo has a very interesting approach to investing in that he looks for companies that have a competitive advantage in their ability to grow into emerging markets and is heavily concentrated in consumer brands, alcohol, and tobacco.

Most of this presentation focused on two aspects of his investing thesis: A company’s capacity to suffer and their capacity to reinvest in their own growth. In essence, he firmly believes that a company that shows a great ability to invest in growth around the world and resist the temptation of showing short term gains at the expense of long term growth is a good investing target. Being able to determine whether a firm passes his litmus test is his skill, but nevertheless the approach is interesting and has resulted in very good returns for his funds. You can see some of his approach here.

The interesting thing for me touches a common thread that is covered by Thomas Russo as well as Rich Pzena which is the emotions that surround investing. For Mr. Russo, for example, he sets limits on how much of an investor’s net worth he allows them to put into his funds. His justification is that if an investor has most of their net worth in a highly concentrated value fund they are likely to see period of significant underperformance, especially in a hot market. The example he gave was “the cocktail party pressure” where two hypothetical investors are having a chat about their portfolios and the traditional investor says that they made 30% that year, and the value portfolio investor says that theirs only grew 10%. This kind of emotional pressure, he explains, is significant. Nobody wants to be the one talking about an underperforming portfolio. Under this pressure, many investors are likely to pull money of their value funds, which no fund manager wants to see.

Rich Pzena explains a similar concept from a slightly different point of view. He explained that statistically speaking, a long term investment in the cheapest 10th decile of the top 1000 US firms will outperform the market with lower long term volatility. That is, lower risk and higher return. When asked why don’t more investors just invest based on that thesis, Mr. Pzena responded by challenging the audience to go and take a look at any of those 10th decile cheapest stocks and put real money behind them. He guessed that more than likely they’ll get a stomach ache and keep their money in their pocket. It is emotionally hard to invest in cheap stocks, because there is typically a good reason they are cheap. I should note that he spoke of a well structured statistical sample, not the idea of picking any cheap stock and expect a higher return. You could very well lose all your money doing that, especially if you don’t know what you are investing in.

And so the old value adage of buying during times of fear and selling during times of greed is easy to say and easy to agree with on paper. But when markets tumble and you yourself are afraid, will you follow this advice? Conversely, when you have cash in your portfolio and all your friends are making great profits in hot, overvalued stocks, are you likely to feel content that you will use that money later, when all your friends are themselves afraid?

More importantly, if you want to follow this advice with your own money, you will need to think about how you diversify your assets. Maybe a small, concentrated value portfolio makes sense for you, if you are diversified in other ways. You have ultimate responsibility for your asset allocation. Your fund manager is ultimately responsible for following their investment thesis.