When I was at Columbia attending the Executive Value Investing Course, several times Bruce Greenwald mentioned the name John Griffin as someone we should pay attention to. Griffin is a highly regarded and successful value oriented hedge-fund manager. Here is his bio from the Gurufocus website:
“John Griffin is the president of Blue Ridge Capital, an investment partnership that he founded in 1996. Mr. Griffin was known as legendary investor Julian Robertson’s right hand man. He and a few others are named as Tiger Cubs as they worked with Julian Robertson at Tiger Funds. Mr. Griffin is adjunct professor of finance at Columbia Business School and a visiting professor at the University of Virginia. He began his career as a financial analyst for Morgan Stanley Merchant Banking Group before moving on to Tiger Management, where he became president in 1993.
Blue Ridge seeks absolute returns by investing in companies who dominate their industries and shorting the companies who have fundamental problems. The firm employs fundamental analysis to make its investments.”
On November 20, 2008, as part of the Value Investing Conference at the University of Virginia’s Darden School of Business, Griffin spoke on a panel discussion entitled “Developments in the Investments Industry”. Here are my notes on his remarks:
In what he called “the spirit of honesty”, Griffin acknowledged that he has no position on the broader macro outlook. He has “no idea what is going on”. He is not concerned with this because, over his twenty-year career as an investor, he has focused on picking stocks that can produce a superior return over a three to five year time period and shorting stocks that will underperform, or “not make it”, over a one to two year period.
The likely reason his shorts work, that is, the underlying companies fail, is a poor economic environment.
His portfolio is generally net long.
The shorts help the portfolio because they can go to zero in a poor market, whereas the longs may go down a lot, but they will come back based on the strength of the underlying businesses.
Constructing the portfolio this way makes it perform in a neutral fashion in a down market and gives Griffin the luxury of being somewhat indifferent to the macro environment. [Note: this is very similar to the approach that Buffett took in running his partnership, although in lieu of shorting, Buffett primarily relied on other forms of hedging (arbitrage, control investing, etc.) to protect his downside risk.]
When Griffin started his own fund in 1996, it was a very difficult period because he did not have a long-term track record, and everyone was fixated on his short-term record, i.e. what he had done in the prior week, month, year, etc.
When Griffin started, he had a large amount of cash to deploy. It was very stressful to go from the comfort of holding cash to putting it at risk. At the time, he wrote on the board in his office, “The future is uncertain; it is always a difficult time to invest.” He constantly reminds himself and his staff of this.
People are very selective in their memories of the past. They remember back to “idyllic” times when it was obvious where to invest, i.e. that it was so obvious to have bought Microsoft when it went public in 1986, or that it was obvious that shorting stocks at the top of the Internet bubble was easy. In practice, this proved to be very difficult to do. Shorts that were highly overvalued become stratospherically overvalued.
It is never easy.
People tend to compare current conditions to past conditions and say that current conditions are abnormal. The problem is that we don’t know if the current conditions are actually normal and the past abnormal. It is a trap to assume that past conditions were normal, because it tends to make you susceptible to what Griffin calls the “reversion to the mean syndrome.”
The “reversion to the mean syndrome” is the idea that if you find a discrepancy, however you define it, that it will revert back to the mean. This has caused huge losses in the past, for example Long Term Capital Management, where huge bets were made that things would revert to the mean. Griffin argues that there is no law that things have to return to the mean and that we may not even know what the mean is. We often do not know what normal is and what it is not in investing.
Griffin had a period when he had success shorting specialty retailers. When these companies would miss very badly on earnings, they did not blame their poor business execution, i.e. merchandising strategy, real-estate strategy, etc., they blamed the weather or that there were a couple less days in the current shopping season. He sees this same attitude crop among investors who blame the market for not properly valuing their long and short investments. Griffin likens this to retailers blaming the weather for their poor performance. He says we should think about this notion of blaming these types of factors, instead of looking at ourselves and our own performance.
Everybody would become a better investor today if they would just acknowledge that they don’t know the direction of the market, and that nobody knows the direction of the market. Simply commit to doing the best job you can, in the most risk adjusted way, based on good research.
You should build your “ark” on “sunny days” for times of deep distress like this past year (2008-2009). This requires, if you are a money manager, having capital locked up so you don’t face redemptions in the downturn before your investments playout and having a portfolio that can withstand some “very serious” hits.
In Griffin’s view, the market has never been rational since he started investing twenty-one years ago.