QB Asset Management Final Letter: Value is the ThingVW Staff
QB Asset Management Final final letter to shareholders
Those who believe in the random walk theory suspect there is no point in trying to outthink the market. Efficient market theorists raised this notion to new heights, using elaborate calculations to show that even though one in a thousand monkeys would be able to pick the next ten-bagger, there would be no causality. Both see markets as fairly efficient pricing mechanisms because market participants have more or less the same amount of relevant information on which they may invest rationally.
In our view, public markets are incredibly inefficient when it comes to accurately pricing risk-adjusted value because they are, by their very nature, organisms that reward or punish assets based on the aggregate of investors’ lowest common investment objectives over the shortest of investment horizons.
The argument that only fools try to out think the market rationalizes index (i.e., “social”) investing. Social investing makes investing seem more like saving. When most investors remain fully invested,perpetually dedicating the great majority of their capital to the markets regardless of underlying valuations or risks, it follows that market pricing is determined by non-cognitive speculators. So, while it may be true that markets are always right at each point in time, they usually do not reflect sustainable risk-adjusted real value. How else might one explain negative real interest rates or Pet.com?
The weak link in the whole chain is not the inability of experienced people to recognize true value, but the institutionalized idiocy of beta investors exercising their mandated fiduciary duties. Ultimately their portfolios may be treated like lambs to slaughter but it will occur with most everyone else and seem like a natural disaster no one could have foreseen. In the interim, they appear to be prudent and responsible. As the logic goes, if one is hugging an index (overtly or closeted), he or she is taking no risk.The market’s overall real valuation – rich or cheap, no matter – plays no part in decision making.
QB Asset Management final letter to shareholders embedded below