Home' Trinidad and Tobago Guardian : August 17th 2014 Contents AUGUST 17 • 2014 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
FINANCE | SBG21
Cobain was in
his prime, there
was little doubt
tive music was.
It wasn t just "an alternative to traditional
rock music"---that could have included
everything from R&B to polka---but a
distinctive genre with Pacific Northwest
roots and a punk sensibility.
Twenty years after Cobain s death,
Wall Street is in the midst of its own
alternative craze, and almost any asset
can be called alternative, as long as it s
not a traditional stock or bond.
Amid a frenzy of new products launch-
es and marketing, apartment building
owners, pipeline operators, farmland and
high-frequency traders all get the label.
And, in just two years, the share of US
mutual fund assets in alternatives is
expected to double to 6.0 per cent, from
3.0 per cent, according to research firm
Almost half of the mutual funds called
"alternative" by Bloomberg have launched
since 2011, and Boston Consulting Group
estimates alternative assets have risen
from US$2 trillion to US$7 trillion in the
last decade. That growth has the attention
of the Securities and Exchange Com-
mission, which is examining alternative
Regulators have asked big alternative
asset managers including BlackRock Inc
and AQR Capital Management for infor-
mation, the Wall Street Journal reported
August 12. Bloomberg News reported in
April that the SEC s concerns include
how boards are overseeing the funds and
how much risk funds are taking.
A suggestion for the SEC: Look closely
at mutual fund marketing material, then
ban all use of the term "alternative." It s
meaningless. People seeking to diversify
their portfolios or protect themselves
from losses can end up in highly leveraged
funds better suited for professional
It s as if a 90s record store put Nirvana
CDs in the alternative bin along with
albums from Boyz II Men, Garth Brooks
and Philip Glass. And in investing, sloppy
categories lead to confusion and bad deci-
sions---far worse consequences than a
Alternatives owe their popularity not
just to clever marketing but to academic
theories about investing risk. By diver-
sifying a portfolio, the theory goes, the
right alternative to stocks and bonds can
lower the risk in a portfolio. Exposure to
alternatives is generally kept to 10 per
cent or less.
That theory only works if investors
choose wisely among a bewildering array
of options, many new and relatively
unproven. Easy to understand are so-
called "real assets" in the alternatives
world; real estate, agriculture, timberland
and commodities. They can protect
against inflation, says University of Illinois
Professor Jeffrey Brown, though he warns
too much exposure can be dangerous.
Real assets can also crash during reces-
sions and economic crises.
Other alternatives are hard for even
experts to understand. There are merger
arbitrage funds, momentum funds and
long-short funds. These complex strate-
gies, borrowed from hedge funds, are
often designed to hold value even when
stock or bond markets are in free fall. Of
course, no one can say for sure they ll
work during the next crisis.
Most investors can ignore the vast bulk
of alternative assets. The high fees on
most of the products are a bigger threat
than the possibility investors might not
have an ideal investment allocation,
argues Brookings Institutions fellow Ben
There s a great quote from famed value
investor Benjamin Graham that all of this
brings to mind: "While enthusiasm may
be necessary for great accomplishments
elsewhere, on Wall Street it almost invari-
ably leads to disaster." That might be a
little strong. But creativity on Wall Street
is often costly for investors.
In May 1984, Warren Buffett laid out everything you
need to know about his investing philosophy.
In a speech at Columbia Business School, later adapted
into an essay, Buffett introduced what he called, "The
Superinvestors of Graham-and-Doddsville."
"The common intellectual theme of the investors from
Graham-and-Doddsville is this: they search for discrep-
ancies between the value of a business and the price of
small pieces of that business in that market."
And that s pretty much it. Buffett doesn t think about
buying a stock; he thinks about buying a business.
The name "Graham-and-Doddsville" comes from Ben-
jamin Graham---whom Buffett studied under at Colum-
bia---and Dave Dodd, with whom Graham literally wrote
the book on security analysis.
In Buffett s essay, he asks readers to consider a group
of investors who outperformed the S&P 500 year in and
"In this group of successful investors that I want to
consider," Buffett writes, "there has been a common intel-
lectual patriarch, Ben Graham ... They have gone to dif-
ferent places and bought and sold different stocks and
companies, yet they have a combined record that simply
can t be explained by random chance."
Buffett explains that the investors of Graham-and-
Doddsville don t care when they buy stocks, or worry
about a stock s beta or the "covariance in returns among
securities." He says these investors are businessmen buying
pieces of businesses, not traders buying stocks.
And the strategy seems to be working out OK: On
Thursday, Class A shares of Buffett s Berkshire Hathaway
eclipsed US$200,000 per share for the first time, and
US$1,000 invested with Buffett in 1984 would ve been
And since 1969, the book value of Berkshire Hath-
away---which Buffett acquired in 1964---has beaten the
S&P 500 43 out of 44 years on a five-year rolling basis.
Said more simply, the relative value of Berkshire Hathaway
shares have been worth more than the S&P 500 collectively
every year but one.
Not to mention that Buffett s personal wealth is esti-
mated by Forbes to be more than US$66 billion.
In July, we featured a chapter from Cullen Roche s new
book, "Pragmatic Capitalism," which debunked the myth
that "you too" can be like Buffett.
You can t, of course. But Roche s point isn t that Buffett s
ideas about investing aren t sound, just misunderstood.
Many think Buffett was a simple "buy and hold" stock
investor, but his investing is about way more than that---
or way less, depending on how you look at it.
Buffett concludes his essay by writing that some may
wonder why he is giving away this basic investment phi-
losophy of a number of investors who have outperformed
Isn t he just giving away the secret?
"I can only tell you that the secret has been out for 50
years," Buffett writes, "...yet I have seen no trend toward
value investing in the 35 years I ve practiced it. There
seems to be some perverse human characteristic that likes
to make easy things difficult. The academic world, if any-
thing, has actually backed away from the teaching of value
investing over the last 30 years. It s likely to stay that
way. Ships will sail around the world but the Flat Earth
Society will flourish. There will continue to be wide dis-
crepancies between price and value in the marketplace,
and those who read their Graham & Dodd will continue
Indeed, all of the research continues to show that the
vast majority of professional and retail investors are under-
performing. Yahoo Finance
Modest proposal for SEC:
The secret to
Warren Buffett advice
from 30 years ago
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