market folly

Fortune recently republished an article that originally appeared in the 1989 issue of Fortune magazine.  "Are These The New Warren Buffetts?" was written by Brett Duval Fromson and highlights investors from that period who were thought to be talented enough to match the investing acumen of Warren Buffett.  Twenty-plus years later, the article accurately pinpointed some amazing investors.

The article identified the following (at the time) young investors:

- Seeking Subtle Signs of Value: Seth Klarman (Baupost Group)
- The Bargain Hunter: Michael Price (MFP Investors)
- Turning Value Upside Down: Jim Chanos (Kynikos Associates)
- A Formula For Deals: Richard Perry (Perry Partners)
- Pairing Value With Arbitrage: Eddie Lampert (ESL Investors)
- A Freudian Grahamite: Randy Updyke
- The Passionate & The Skeptical: Glenn Greenberg & John Shapiro (Chieftain Capital)
- A Scientist on Wall Street: Thomas Sweeney (Fidelity)
- Mr. Preservation of Capital: John Constable (Constable Partners)
- Mr. & Mrs. Aggressive: Jim and Karen Cramer


Wisdom From The "Next Buffetts"

As you can see, the list highlights some gems.  However, the best part of the article is that each investor shared some rare nuggets of wisdom regarding their approach that we wanted to draw attention to:


Seth Klarman: "Klarman's exceptionally quick and subtle mind allows him to see value in many different guises.  With stocks high, he looks for 'market-insensitive opportunities.'  By that he means companies whose financial performance depends on bankruptcies, announced mergers, liquidations, restructurings, or spinoffs -- corporate events largely independent of the vagaries of the financial markets."  Klarman focuses on the downside, saying: "I focus on what could go wrong.  Before buying, we always ask ourselves, 'what would we pay to own this company forever.' "  For more from this great investor, we've posted up Seth Klarman's recommended reading list.


Michael Price: "I like cheap stocks.  I'm basically a guy who looks at a company's balance sheet and asks, 'what is the company worth? Give me a number.'  If the answer is, 'Substantially more than the price,' then I get interested."


Richard Perry: "His investment approach? E(V) = {P(UPx) + [(1-P) (DPx)]} / (1 + COF).  That simply means he values a deal by calculating the odds that it will go through, how long it will take, and what the investment is worth with and without the deal.  Why all the effort to quantify?  Says Perry: 'There are no lay-ups in the arbitrage business.  This helps us maintain clear, high standards for buying a deal.' "  For more thoughts on this strategy from well-known investors, we've also posted up John Paulson on the risk in risk arbitrage.


Jim Chanos: "Chanos is in truth a perverse kind of value investor.  Using the same techniques as the others, he looks for overvalued stocks.  He stays mainly in large-capitalization issues.  That way there is more liquidity and thus less chance of a short squeeze, which would force him to liquidated his position because he could no longer borrow shares from brokers."  For more on his approach, we've posted up Chanos on the psychology of short selling as well as Chanos on the power of negative thinking.


Eddie Lampert: "Arbitrage helps our value investing.  If we can earn 20% to 25% annualized returns in arbitrage, then for the long term we can buy only stocks that we think will earn comparable rates of return.  Conversely, if deal stocks get overpriced, we will begin investing in companies with good long-term prospects at low prices." 


Randy Updyke: "Investing is about survival.  I stay away from the herd.  I like to buy things for a lot less than I think they are worth.  But to me the psychology and mood of the market are more important than anything."


Thomas Sweeney: "People always panic.  If you study this phenomenon over time, you see that eight times out of ten you make money by buying into a panic."



Be sure to check out the full re-published version of the Fortune article, where you can see Chanos rocking a sweet mustache and other great vintage pictures.