Sunday, August 15, 2004

Star Investors Hold Cash

Jim Gipson, Bob Rodriguez, Mason Hawkins, and David Winters are not exactly household names. For investment and/or mutual fund junkies, however, they are recognized for their superior, market-pounding long-term performance. These investors are thorns in the side of efficient-market hypothesis defenders. Academics (of all people) who cannot account for intellectual virtue (at least as it relates to investing), and think that markets are mostly fairly-priced at all times consider these anomalous investors "statistical outliers," inexplicable deviators from the mean or average; and, right now, these academic curiosities are holding tons of cash. Add to this group the most famous outlier of them all, Warren Buffett, and you have lots of cash sitting on the sidelines.

It is difficult to know when the market will be cheap enough for these stars to put that cash to work; and when we find out that they have, it's likely that the opportunity will have already passed. In fact, the play they are getting in the NYTimes may be an indication that we're close to the time when prices are getting cheap enough for them to pounce. In any case, the stock market has been getting cheaper, and may continue to do so as oil prices rise. The declines that cause fear in most people tend to cause these strange birds to salivate. So their intellectual abilities to evaluate companies are coupled with a kind of self-reliance, confidence, or ability to move counter to the crowd (and consequently capitalize on its mistakes). Besides the fact that they can make you money, these characters are simply fun to observe. It bespeaks the perversity of academic finance (or most academic finance) that they are considered statistical outliers.


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