Thursday, December 07, 2006

Julian Robertson

Hedge fund manager, investment conference impresario and newsletter publisher Whitney Tilson has a terrific piece in the latest edition of his Value Investor Insight in which he does a mea culpa to legendary hedge fund manager Julian Robertson, who quit the business in 2000 at the height of the last round of stock-market insanity.

The mea culpa deals with comments Tilson, a big fan of Warren Buffett, wrote when Robertson threw in the towel. He noted that Robertson and Buffett have different styles, reflected in their portfolios at the time: Buffett likes high-growth companies with high margins, great balance sheets and returns on equity that exceed their cost of capital. Robertson opted for the ultimate value stocks with high debt, low margins, poor returns on equity and erratic growth. "This is a lame collection of companies...which deserve to trade at a low average multiple," Tilson wrote.

Fast-forward to today and, as it turns out, Robertson's 2000 portfolio shows why he, too, is considered a legend: In a period when the S&P 500 slipped 7%, his portfolio boomed by 120% compared with a 38% rise for Buffett's Berkshire Hathaway. Both, Tilson points out, handily beat the market.

Speaking of the markets: Robertson quit because he felt it was too irrational. What does he think now? "Surely you don't see the same degree of irrationality today that existed then?" Tilson asked. "Oh yes sir, I do," Robertson shot back. "There's a more serious bubble today than there was then."

[via Tom@chucks_angels]

A Rate-Cut Bump

Nothing excites Wall Street more than the possibility of a new round of rate cuts by the Federal Reserve.

Stock market history shows that when the Fed started cutting rates, investors typically received a greater than two-for-one stock price return - in other words, more than a year's worth of stock market advances (based on the average annual gain for the S&P 500, since 1945, of 9%) in six months.

The Sharpe Ratio

An essential element in evaluating any investment is knowing the level of risk involved. If an investment involves too much risk, then it may not be suitable for your portfolio even if it has the potential for high returns. Conversely, you may be willing to accept lower returns on an investment if its risk level is relatively low.

In order to take risk into consideration, you need to find a way to compare different investments that looks at more than just performance. One measurement, called the Sharpe ratio, can help you incorporate the risk of an investment into its overall return. By looking at the Sharpe ratios of different investments, you can better understand how much of an investment's return comes from the risks it assumes.