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Patton Biggs: Believers in Value Investing or Traitors – A Review of Hedge Funds

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Patton Biggs: Believers in Value Investing or Traitors – A Review of Hedge Funds

Text | Contributing Author Wu Su

Edit | Guo Nan

There has always been a chain of buyer-to-seller contempt in the investment community: top sell-side researchers may become close friends and counselors, but investment managers are more willing to communicate positions and investment strategies with their buyer counterparts, because they still think that most seller's research is "taking Zhao Kuo on paper, and winning Kong Ming afterwards" rhetoric, and the risks that sellers and they take are not the same.

If you think that the author of Hedge Fund Chronicles has long served as Morgan Stanley's chief strategy officer and chief strategist and lacks practical experience, it is biased, because before becoming a morgan Stanley partner, Barton Biggs and his friends founded Feifeld Partners in 1965, is the earliest hedge fund practitioner, and is one of the few excellent sell-side analysts in the industry with buyer experience. In the author's own words, the long period "developed my ego in the face of an indifferent or half-believing audience to show off my theory"; As a hedge fund manager, in the face of asset shrinkage, "I have undergone tremendous mental torture."

Since the first book in the series was introduced to the Chinese market in 2007, it has influenced generations of financial practitioners. Now more than a decade after the death of Barton Biggs, after years of revisiting this book, I believe that readers will have more gains, because "there is nothing new under the sun" - the market has never been "different", but a contest of greed and fear again and again.

Patton Biggs: Believers in Value Investing or Traitors – A Review of Hedge Funds

In the book, Patton makes no secret of the fact that he was a "lucky man born with a golden spoon": he was born into a noble family on Manhattan's Upper East Side, his grandfather was a senior health official in New York City, his father was a Harvard graduate, and he was the chief investment officer of the Bank of New York for a long time. However, the young Barton "had no passion for economics", and after graduating from Yale University's English department, he went to work as an English teacher at a Washington preparatory school, writing novels in his spare time and dreaming of becoming a great writer. Patton's writing path didn't go well, with letters of rejection and out-of-place relationships with his family re-examining his career— his second brother had found a job at an established Wall Street pension fund after graduating from the London School of Economics and Political Science, and chatting at the dinner table at home made Barton feel like a fool.

After graduating from business school, with the blessing of his banker dad, Barton Biggs found an analyst position at his father's friend's company, and at the age of 29, he officially entered Wall Street. Twelve years later, in May 1973, Morgan Stanley extended an olive branch to Barton: he was invited to become a partner with a 3% stake and an annual salary of $50,000, thus beginning Barton's 30-year career in Greater Moore, and he also witnessed Morgan Stanley's growth from an "aristocratic" small investment bank to the world's top investment bank, and Barton himself was repeatedly named "America's First Investment Strategist" by magazines such as Institutional Investor. If he had held $300,000 worth of stock that year, he would now be worth about $3.984 billion, 13,280 times more than it was in 1973, with a compound annual return of 21.38 percent — compound interest once again showing the world its charm.

The story doesn't end there yet. After retiring from Damo at the age of 71, Barton, whose wealth had long been free, started again, roadshowed and raised funds like managers in his early 30s who had just established himself, launched his own hedge fund, and began another "desperate crazy journey", because in Barton's view, "professional investment is the best game in the world, which may be the only game that is still an advantage at an early age".

For the next eight years, Patton spent the next eight years in a perilous market environment of the subprime mortgage crisis and the European debt turmoil, until the last moment of his life. The last book in the Hedge Fund Series was translated as "Whispers of the King" because it recorded the feelings of an old man who had experienced the world about investment transactions in the middle of the night. The author believes that "recording the torment and pain of the investment process helps you understand yourself and improve your investment behavior." Seven weeks after writing the book, Barton, accompanied by his children and grandchildren, calmly completed his legendary life. When you first read the book, you may be dazzled by the various characters who appear in the book in turn: there are elderly, bell-like "Egyptian pharaohs" who are ready to "aim!" Fire! Jim, the "board machine", has a gold believer who wanders alone in the Valley of the Sun, a "Maine" expert who uses Fibonacci sequences to predict the future, Peter the Great who controls the Battlestar Galactica, and a poor analyst who accidentally got the mysterious "Special Issue" of the Wall Street Journal to predict the future and finally died. As the author puts it, these stories are "like magic shoes, like fountains of youth, everyone has dreamed of it, but no one believes it can happen, especially here—New York, an ugly city where even the sun is cold and hard; Wall Street, this place where there is no love and mercy, only numbers and dollar signs. Sometimes, reality is more bizarre than fantasy. ”

Sixty years ago, a letter of rejection may have made the literary circle at that time one less writer, but it contributed an excellent investor to the capital market. Barton Biggs's brilliant brushwork has become particularly vivid through countless market storms, and each story is meticulous and fascinating.

But after the hustle and bustle, perhaps readers would prefer to gain some insights about investing. If the second "Tragic Hero" fulfills the author's dream of being a writer, creating a "modern version of the hedge fund tragedy"; The third "Whisper of the King" is the author's investment diary from mid-2010 to May 2012, mainly recording his market views and investment operations, so the first "East Evil West Poison" may be the best choice for us to seek investment tips.

Patton Biggs: Believers in Value Investing or Traitors – A Review of Hedge Funds

A basic question is: Is Barton Biggs a believer in value investing or a traitor? Just as there are different genres of art, the martial arts world is divided into sword sect and qi sect, and the investment community is also divided into fundamental-oriented value investment school and buying up and not buying down trend investment school. If one school is switched to another, it is surprising that the author's words are "like a Catholic converting to Judaism." As for the author himself, it is mentioned more than once in the book that he is a "value investor and a believer in fundamental analysis." In the "Memoirs of a Stock Maker", which the author greatly appreciates, "Don't expect the market to shout at you, but listen carefully to the whisper: 'Run!'" Otherwise it will be too late. "Extreme trend-following styles can cause big swings in performance – in good times, flowers are blooming, and bad things are a mess. Despite deep respect for the keen judgment and market smell of trend investors, the author bluntly says that his investment philosophy is very different from theirs.

However, it is one thing to be an idea, but it is often another thing when it comes to investment behavior. In the eyes of value investing gurus Warren Buffett or Charlie Munger, it may be difficult for them to agree that Barton Biggs' hedge funds fit their understanding of value investing. The biggest feature of hedge funds is "shorting" - whether it is short selling major indexes to hedge long positions or shorting individual stocks, they benefit from the decline in the price of the asset that is "shorted". The value investment faction represented by Buffett has always been insensitive to "short selling", believing that short selling has a lackluster contribution to account returns in the long run, and even the frequent transactions brought about by shorting will damage earnings.

If you use the baseball analogy: value investors would rather risk being knocked out by a triplet than strike decisively when the ball lands in the most confident hitting zone — because swinging the bat to hit the wrong ball drastically reduces their success rate. And hedge fund managers are obviously going to have a hard time doing: "Look at those hedge funds — do you think they can wait?" They don't know how to wait! Charlie Munger said in The Poor Charlie's Book. In addition, swinging the bat too often will also lead to when you find a "good ball", you can't use all your capital to attack. As for the advantage of shorting to reduce the volatility of the combination, it is not worth mentioning in the eyes of Charlie Munger: "As long as the final result is very good, what about the process is a bit tortuous?" So it doesn't matter if the performance fluctuates a bit."

From the perspective of hedge fund managers, the author gives an explanation for his own behavior: investors' fear of volatility and the way they evaluate performance with relative returns make waiting for short positions seem too luxurious, and we must "hit the ball". The author uses the term "oil bear robbery" to describe his experience of shorting oil in May 2004. According to their analysis, the oil price target is at $20 a barrel, so it began to go short at $40 a barrel. Unfortunately, oil prices began to rise at a nearly vertical angle under the onslaught of a series of external events, including terrorists sabotaging Iraqi oil pipelines, Russian oil majors jailed over tax issues, and recounting votes in Venezuela's presidential election. Although from the perspective of value investors, price deviation will only make the investment more valuable, but even high-net-worth customers with high risk tolerance cannot withstand the performance roller coaster jump, so "the love of the years has become nothing", 30 years of old customers have submitted redemption applications, in the author's eyes, "30 years of trust in these months into nothing", "this is not the pain of flesh and skin, but the pain of drilling the heart". Berkshire, which has a lot of cash in its hands, may not care about volatility, but hedge fund managers who "experience the feeling of dying once a day on bad days" are more likely to face the test of survival or death because their investors vote with their feet.

Coincidentally, the author also mentions Joan, an investment manager at another large investment management firm, who struggles with relative returns. Joan's portfolio has yielded almost 3 percent of its annual returns over the past three years, but in 2004, the 51 percent growth was just 5 percent below the benchmark, and she was put on the "retention watch" list by two big clients, not knowing how to explain it to investors. 20% of the 56% performance benchmark is exchange rate effect, and Joan's portfolio does not allow holding foreign currency assets, which means that she needs to capture this 20% of the gains through pure investment, while Joan only catches 15% of the results and obviously does not reach the passing line. "Such a performance monitoring system is really a waste of human life!" The author said with indignation.

Wall Street used to use rat races to describe the asset management industry — rats in cages can't do without cages no matter how they run, exhausted but with little success, and seem to have forgotten the origin of the industry: creating income for holders. Whether managers' earnings are good or not lies in comparison, and whether they can outperform the benchmark is more important than the absolute number of performance itself, which cannot but be said to be an inversion of the horse. Constrained by relative returns, it is difficult for fund managers to wait for a desperate bet like Batfie to swing the bat, because their performance benchmark will not be 0, and the author's words "a drop in water level is a decline in net asset value", they can't afford to wait. On the one hand, long-term performance is required to exceed the benchmark, on the other hand, short-term performance is not relaxed, no matter which is not conducive to investment managers to make excellent long-term investment decisions, in such a "high-pressure" environment, even value investors have a lot of helplessness.

For investors, whether short or long, value investment or trend investment, in fact, is not so important, because the income is king - "white cat black cat, catch the mouse is a good cat." But regardless of the investment strategy adopted, one thing is certain: "In the impact of speculative forces, the role of emotions has deviated from the normal track of business and industry." People who just want to link stock movements to business statistics are doomed, because their judgments are still based on the two basic dimensions of facts and data, and the game they participate in is played in the third dimension of emotion and the fourth dimension of dreams. This sentence comes from Marnie Winkman's "10 Years on Wall Street" quoted in the book, and I believe that Chinese and foreign investors will feel the same way, even value investors such as Buffett will use "crazy partners" to compare the market, proposing to use the habits of the market instead of being subject to the market.

Patton Biggs: Believers in Value Investing or Traitors – A Review of Hedge Funds

In addition to the explanation of investment philosophy, the author puts forward unique insights for individual investors and professional investment managers in the book, which to this day seems to be thought-provoking and worth reading again.

First of all, ordinary investors should adjust their expectations and make long-term investments. The complexity of investing goes without saying that it is not easy for the average investor to win such a game, so expectation management is very important: "Don't dream that you can surpass professional athletes, don't expect to win money from professional players, and the same is true in the investment market." If you hold a fund, unless the manager "acts out of focus, is afraid, or changes his investment style," he should not choose to redeem when the fund is not performing well, because it is "a costly wrong decision."

The book mentions that after the big bull market in technology stocks in 2000, American research institutions have done research: the S&P 500 index rose by an average of 16% per year in the same period; After deducting the average rate of 2.2%, equity mutual funds returned an average of 13.8% per year, which was basically not outperforming the market. But surprisingly, the average investor's average annual return is only 7% – because "they always switch between different funds or between funds and cash at the wrong time". The same phenomenon also exists in the A-share market, timing and chasing market hotspots are always the topics that people are happy to do, trying to seize every "outlet", but often cut as a leek; In the words of the author, it is destined to be a "futile and extremely costly move", a phenomenon that deserves the deep consideration of every investor.

If you wish to hold a stock, then consider the example of the author's mother. In the early 1970s, the author's father chose a growth (and cyclical growth) portfolio of stocks for his mother, including Coca-Cola, Citi, General Electric, Pfizer, and other "stocks that are so down-to-earth that people can sleep peacefully." Despite the outstanding performance of the growth portfolio, as value investors, they "will never fall in love with the stocks they hold," a drawback of growth investors: Even when fundamentals change, they are often reluctant to abandon their "favorite stocks." "You can go and love someone, love a puppy, but don't be obsessed with a stock." The author and brother will always focus on their mother's stock portfolio — when the company loses its original growth, they will decisively remove it from the portfolio. By the time my mother died at the age of 95, the portfolio was worth 152 times the initial investment, with an annualized yield of 17 percent over a 32-year period — many stocks paid more dividends a year than they had.

As Buffett said, "Compound interest is the eighth wonder of the world, don't interrupt it when it's not necessary." "This is not so much a miracle created by America's strong national fortunes as it is a successful case of value investing applied to growth stocks." In the author's own words, he is an "agnostic" who disagrees with both growth and value investing because the investment credo often fails at critical moments." But because value investing yields more in most cases, I prefer value investing. "Of course, no matter what kind of investment, patience is still a must.

For investment managers, a steely will and strong self-confidence are necessary for career success. "Perhaps because the investment industry is full of insecurity, investors experience more pain when they fail than when they earn money, and the torture is always greater than enjoyment." Pain leads to anxiety, which in turn causes investors to make bad decisions. In the book, even the best investors will step on the wrong rhythm, mess up the dance steps, have problems after a mistake, and even fall into severe insomnia, seeing customers before and after the stomach pain is always severe, the doctor diagnosed as anxiety caused. "It's like sports, it's always confident that players can win. Investors always perform best when they are free of ideological baggage and distractions." The author believes that the overall staring at the Bloomberg terminal, the computer screen shows the profit and loss of the fund per minute, which does not help the thinking in the slightest, "constantly monitoring your investment performance is not conducive to your mental health, nor is it conducive to your investment results." You might as well learn about your performance every day, but don't let your emotions be swayed."

As for how to manage your emotions, the authors give two suggestions for exercise and vacation. "I'm passionate about exercising, and I think it's the best recipe for staying healthy – especially on difficult days when it's better to play a highly confrontational race or climb a mountain. When lifting weights or running, I listen to audiobooks on the iPod." And empty all stocks when the market situation is uncertain, and then take a vacation; After the vacation is over, it is also a good choice to start building a new portfolio.

This is not the author's first, as it was adopted by two great investors, Jesse Livermore and Bernard Baruch, as early as the first half of the 20th century, and vacations have benefited the authors a lot. In contrast, in China, generally after retiring at the age of 60, it is rare to see practitioners over 70 years old who are still struggling in the front line of investment, and the star manager who died young is not news, which is really stifling. Exercise and vacation may sound like clichés, but it's not easy to actually do.

Extensive reading is also one of the author's most important recommendations for investment managers. "As an investor, you have to be able to control your own knowledge-learning environment and not let the outside world control you. Not only business books, but also history, novels, and poetry should be read – the key to investing is to understand the rise and fall of the world and understand the trend of people's emotions. This is where fiction and poetry come in. In the introduction to The King's Whisper, the author's son, Patton Biggs Jr., said: "He (the father) majored in history and literature, and whenever he talked about investment, he always quoted the verses of Foster or Yeats, or learned from a famous battle in history." As an investor, much of his achievements can undoubtedly be attributed to his ability to apply universal philosophies of life to his work. ”

Although we who are accustomed to Chinese contexts may not be familiar with these works, they are constantly changing, and the author's extensive reading suggestions are very universal. Charlie Munger, who is also an evergreen in the investment world, has made the same suggestion, and he himself even describes himself as "a book with two legs". Interestingly, both investors admired Robert Schiedelsky's Biography of Keynes, which the author considered "undoubtedly the most beautiful and authentic biography I have ever read, which I often revisit," and even devotes a chapter to the book. In addition to his role as an economist, Keynes was also a macro investor, a hedge fund manager, a whole generation before the authors. In the author's view, Keynes was "a gambler armed with science, using the fluctuations of the economic cycle to speculate on currency and commodity futures" and using enough leverage, which is almost the same as today's hedge fund operators.

Although the author was born with a golden spoon, he does not believe that the success of investment has anything to do with the birth of a famous family or the graduation of a famous school. "A blonde resume may be a stepping stone to your job search, but most investment winners don't come from prominent backgrounds, just have brains, guts, determination and intuition. It is the performance, it is the numbers that measure investment", which may be why the author in "Tragic Heroes" set the background of the protagonist Joe Hill's growth background in a remote town in Virginia, where Joe Hill, who came from a poor background, received a full scholarship as a football student and entered a third-rate university, but broke through the hedge fund world with competitiveness, hard work and resilience.

Looking at the domestic financial industry, the degree of "inner volume" is no less than that of Wall Street, and the "theory of only birth" is even more rampant, and it is difficult for cold students who have no background to find a decent investment job in securities companies and funds. But the author, who has 40 years of professional investing experience, has been trying to tell readers that there is no market for "birthism" in the investment world, and that "professional investors must at least have a love and passion for intellectual competition and be able to cope with pressure and adversity." Focus and greed are not enough, fund managers should truly love the complexity of the game." It's a tough process, but investing is a level playing field that everyone can participate in, and that's perhaps what makes it so.

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