Mittwoch, 6. Januar 2010

Applied Value Investing, Austrian Style

This is a post from Ludwig von Mises Institute:

C.J. Maloney:

Being a practicing investment professional with an open admiration for the Austrian School has often led to me being asked if I apply my "macro" beliefs to my investment methodology. My answer has always been a resounding no. One of the reasons is that being afflicted with an Austrian outlook can turn many a would-be investor into a permabear; if I were truly a hardcore advocate of Austrian investing, my only assets would be a shotgun and a bag of gold. And most important to a bookworm, I have never come across any writing that attempted to weld Austrian thought onto an investment framework — until now.

Joseph Calandro Jr., who among many other job titles is an insurance giant's risk manager, an author, and a professor at the University of Connecticut's MBA program,[1] has just published Applied Value Investing. His book is an attempt to "adopt the modern Graham and Dodd approach and apply it in a variety of unique and practical ways" (p. xii), Graham and Dodd being, of course, the two gentlemen who wrote the book on stock-market investing, 1934's Security Analysis. He laments that many investment how-to guides "give great advice on what to do, but they do not tell you how to do it" (p. xix).

Mr. Calandro set out to remedy that shortfall and created a book that stands out from the crowd. To all those college kids who have ever asked me if I apply my "macro" beliefs to my investment methodology, I strongly suggest you pick up what Mr. Calandro has to offer. It is well written and worthwhile.

Coming in at an easy-breezy 230 pages, the bulk of the book is devoted to the use of the Graham-Dodd methodology to analyze a number of large-scale equity investments, among them Edward Lampert's 2004 acquisition of Sears and Warren Buffett's GEICO and Gen Re acquisitions. It is Buffett's investment acumen more than anyone else's that Mr. Calandro admires. Calandro shares the man's faith in the usefulness of the Graham-Dodd approach (which says it is possible to outperform the market over the long run) versus the "efficient market theory" (EMT, which states that you cannot).

Mr. Calandro quotes that great investor's quip: "From a selfish point of view, Grahamites should probably endow chairs to ensure the perpetual teaching of EMT" (p. 112). Mr. Buffett has gained prominence by personifying the fact that yes, Virginia, you can beat the market in the long run. Mr. Buffett excels at taking advantage of those who deny someone like him can exist.

It's the little things that make a life, and that amusing quote from Mr. Buffett highlights what, to me, is the surprising pleasure of this investment book — it does not read like an investment book. Mr. Calandro's style is easy on the eyes, informative, and (unlike far too many books of its kind) does not read as if it was written by a computer.

For instance, in the chapter on the Sears acquisition, Mr. Calandro takes a few moments to give a brief background on the history of the company, humanizing the story and inserting flesh and blood in between all the net asset value calculations. As a reader you appreciate the humanization, while as a professional you value the details. For his chosen genre, Mr. Calandro plays music for the masses.

Humanizing economics is standard fare for the Austrians, and this book, being Austrian influenced, lives and breathes. Among the seven chapters it is the fifth, "Macroanalysis, Opportunity Screening, and Value Investing" where the book holds, for me, its biggest contribution to the genre: it takes the "macro" outlook as step one.

Mr. Calandro holds that "it could be easier to 'buy during periods of pessimism and low prices' if you understand the macroeconomic reasons behind the pessimism" (p. 110). And he takes what is mistakenly called "the macro" and explains it using the Austrian view, which is decidedly (and mistakenly called) "micro." Since economics all starts with the individual, this approach makes perfect sense, avoids confusion, and saves time for video gaming.

Mr. Calandro laments that "the field of mainstream economics today is, in many ways, extremely troubled" (p. 227), which is a polite way of saying that all the PhD mathletes who have infested the profession haven't the slightest idea what they are talking about. To help investors out of the bog, Calandro borrows thoughts from sources diverse, from Robert Shiller to Charles Mackay. Calandro takes the reader through the different stages of the Austrian business cycle, which he divides into eight pieces using reflexive-market theory, Austrian Business Cycle Theory, Graham-and-Dodd insights, and a mix of technical and behavioral elements (p.138).

Mr. Calandro's university classes must be a pleasure: his explanatory style is designed, not to show you what a bright man he undoubtedly is, but to explain. He eschews showing off and, God forbid, comes down to a level at which the reader can walk away understanding where Calandro's coming from, rather than wondering what all that math had to do with anything. At one point, he bought me back to my MBA-student days studying the NASDAQ boom through the use of "price to hits" to justify the craziness. Calandro's use of the term fundamental substitutes gave me a laugh from memory. How many investment tomes have you read that managed that?

Mr. Calandro not only strives to teach a method to avoid the delusion, but to attempt to profit from the resultant cleaning out when the bubble bursts. "Fundamentally sound investments are often liquidated along with unprofitable ones," thus creating opportunities that "Graham and Dodd practitioners in particular can profit from" (p.120).

And this book will show you how.

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