That was a valuable lesson in not following the crowd while whale-watching, and it’s one that many of us in the investing world could have used recently. In Wall Street lingo, whale-watching refers to following and potentially copying the moves of the big boys, or the wizards of investing. It’s a seasonal sport, when institutional investors have to reveal their moves in quarterly filings with the SEC, and every big buy by the investment stars is noted with breathless anticipation.
Over the past year or so, however, if you were a whale-watcher, you could have wound up like Captain Ahab, fatally clasped to a plunging Moby Dick, sunk to the bottom of the investing ocean. First to take the downward plunge among the big fins of the deep was the flayed carcass of sharkish Bear Stearns, followed by the rotting remnant of Lehman Brothers, reduced to little more than a filet.
It’s difficult to fathom how the biggest whale of all, Warren Buffett, made several self-professed blunders, including buys of Irish banks that were full of more blarney than capital. Steven Cohen of SAC Capital, the secretive so-called “Hedge Fund King,” was buying stocks like General Motors that were already dead in the water.
Other stalwarts of investing like Bill Miller of Legg Mason floundered badly as well. Miller, who guided his fund to a better performance than the S&P 500 for a record 15 years ending in 2005, posted the worst performance of his 27- year career in 2008 as his $3.28 billion Value Trust trailed 99 percent of competing mutual funds.
It’s not just investment fund managers who sank to new lows, however. According to a new report in the Boston Globe, the Pension Benefit Guaranty Corporation, which protects the pensions of nearly 44 million American workers and retirees, decided shortly before the stock market crash to switch from a conservative allocation relying heavily on bonds to more speculative investments such as stocks in emerging foreign markets, real estate, and private equity funds. The ultimate cost to PBGC could be in the billions, according to some analysts. Behind the switch was Charles Millard, a former Lehman Brothers executive, who ran the agency from 2007 until the end of the Bush administration.
The mayhem among the so-called smart money set has been so widespread that it calls into question the notion of expertise in investing and affirms the assertions of sage market observers like Burton Malkiel (A Random Walk Down Wall Street) and William Berstein (The Four Pillars of Investing) that it is nearly impossible to beat the market. As Nicholas Kristof observed in a recent column, numerous studies in various fields have “confirmed the general sense that expertise is overrated.” It was a common saying on the racetrack when I was working there, researching a book, that you only have to be right once to be an expert, and I’ve found that to be true in the market as well. All the rest is probably blubber.
As an inveterate whale watcher myself, I have my own conclusions about how at least some of these whales failed to navigate the recent troubled waters. The apparent geniuses of the market in recent years have been those who managed to avoid the worst of the dotcom boom and bust, and that was largely because they were “value” investors, always looking for the least expensive, undervalued stocks rather than “hot” growth stocks. However, even Warren Buffett succumbed to the “value” trap last year, betting on low prices and ignoring danger signals. As Buffett himself said, you only find out who’s been swimming naked when the tide goes out.
I’ve concluded that rather than whale watching, we would have been better off trying to find Nemo – as long as there weren’t any barracudas around named Madoff.
