{"id":73,"date":"2012-07-23T00:43:43","date_gmt":"2012-07-23T00:43:43","guid":{"rendered":"http:\/\/www.wallstreetandkstreet.com\/?p=73"},"modified":"2012-08-22T18:46:43","modified_gmt":"2012-08-22T18:46:43","slug":"mrs-biggs-secret-stock-market-formula","status":"publish","type":"post","link":"https:\/\/www.wallstreetandkstreet.com\/?p=73","title":{"rendered":"Mrs. Biggs\u2019 Secret Stock Market Formula"},"content":{"rendered":"<p>Wall Street superstar Barton Biggs, who died last week, was\u00a0 one of Morgan Stanley\u2019s high-profile equity strategist, appearing regularly on CNBC and in\u00a0<strong><em>Barron\u2019s <\/em><\/strong>annual \u00a0investment roundtable.\u00a0 Unlike many sell-side big shots, he actually invested in the stock market.\u00a0\u00a0 Biggs eventually migrated to the \u201cbuy side\u201d (Morgan Stanley Asset Management) where he was a pioneer in emerging market investing. \u00a0After the tech bubble he left the brokerage business entirely and cofounded a hedge fund, Traxis Partners.<\/p>\n<p>Biggs lived most of his life in Greenwich Connecticut, epicenter of the hedge fund industry.\u00a0 His 2006 book<strong> Hedge Hogging<\/strong> is an amusing and informative pastiche of fund manager profiles, as well as a savvy primer on investing in stocks, bonds, and art.\u00a0 We learn about fibonacci numbers, the relative merits of growth stocks vs. value stocks, the perils of group think in investment committees, and the \u201cviolence of secular market cycles.\u201d\u00a0 Biggs captures the egomaniacal ethos of the hedge fund world through such characters as:<\/p>\n<ul>\n<li><strong>Ian<\/strong>, who started his fund with only $8 million in the 2001 bear market.\u00a0 To get started he \u201csold his apartment and house in the Hamptons and moved the family into a grubby rental.\u201d\u00a0 Ian is so intense that he sleeps with his portfolio and grinds his teeth in his sleep.\u00a0 Biggs liked that and gave him some money to run.<\/li>\n<li><strong>Grinning Gilbert<\/strong>, who after a couple of good years during the 1990s tech bubble bought a mansion on Round Hill Road in Greenwich.\u00a0 Gilbert\u2019s wife, \u201can aggressive, ambitious personality,\u201d poured money into the house and \u201cperformed a full cannonball into the Greenwich social pool.\u201d\u00a0 They moved into the mansion in 2000, at the apex of the tech bubble.\u00a0 But the fund withered over the next two years and a traumatized Gilbert retreated to his bedroom, subsisting on toast and soup for a week.\u00a0 Eventually they decamped from Round Hill Road for parts unknown.<\/li>\n<li><strong>Vince<\/strong>, the \u201cbearded profit of the apocalypse,\u201d who opined to Biggs in 2005 that \u201cResidential real estate is the next big disaster.\u00a0 People are borrowing short to invest long, refinancing mostly with floating-rate mortgages.\u00a0 When short rates go up, debt service payments will soar and house prices will decline.\u00a0 Then the consumer collapses from the double whammy of the wealth effect and shrinking disposable income.\u201d\u00a0 Great call, Vince!<\/li>\n<li><strong>Fayez Sarofim<\/strong>, the famous mutual fund manager based in Houston.\u00a0 Sarofim told Biggs that big pharma stocks such as Merck were cheap and attractive.\u00a0 Bad call\u2014 they were cheap for a reason and would get\u00a0cheaper because of the new product drought.<\/li>\n<\/ul>\n<p>Mostly inadvertently, Biggs shows why hedge funds are a problematic asset class unless you are lucky enough to hook up with a genius such as George Soros, Steve Cohen, or Leon Cooperman.\u00a0 \u00a0Managers are under intense pressure to put up good performance sooner rather than later\u2014before investors leave the fund. \u00a0This can lead to short-term thinking, over-trading, and herd following.\u00a0 In bear markets some investors in a fund may panic and pull out, forcing the fund to sell stocks precisely when it should be buying. \u00a0Hedge funds\u2019 fee structure\u20142% of funds under management plus 20% of profits\u2014creates perverse asymmetric incentives for managers.\u00a0 If a fund scores big the manager can get rich quick, which may prompt him to \u201cswing for the fences\u201d by taking excessive risk. \u00a0On the other hand, if the fund declines sharply the manager may close it (or his employees may leave) because he can\u2019t have a big pay-day (a 20% cut of profits) until after it gets back to the \u201chigh water mark,\u201d the level where the fund was started. \u00a0Yet another problem is tax inefficiency: most profits are short-term gains taxed as ordinary income rather than as long-term capital gains. Given these drawbacks \u2013 high fees, perverse incentives, tax inefficiency, and an unstable structure \u2013 hedge funds\u2019 popularity is, frankly, rather surprising.<\/p>\n<p><strong>Mrs. Biggs&#8217; Big Boring Score<\/strong><\/p>\n<p>Ironically, late in the book Barton Biggs gives us a fascinating example of a buy-and-hold strategy that looks a lot more boring and a lot more attractive than buying hedge funds.\u00a0 In the early 1970s\u00a0Barton&#8217;s father, who was the Chief Investment Officer of the Bank of New York,<\/p>\n<p>&#8220;was worried about his health and inflation and suspected my mother would outlive him by a considerable number of years . . . So he constructed for my mother a portfolio of growth stocks (and cyclical growth stocks) such as Phillip Morris, Caterpillar, Exxon, Coca-Cola, AIG, IBM, Citicorp. Hewlett-Packard, Berkshire Hatheway, GE, Merck, Pfizer, and so on \u2013 nothing very imaginative, but solid, long-term companies you would want to sleep with.\u00a0 When she died two years ago [circa 2003] at age 95, her cost on many of these positions was actually less than the current dividend.\u00a0 My mother\u2019s portfolio compounded over 32 years at 17% a year\u2026.I figure the purchasing power of her income stream compounded at roughly 12% per annum\u2026..My brother Jeremy and I watched her list intently, and from time to time, we did weed out and replace a few companies that we thought were beginning to falter.&#8221;<\/p>\n<p>Mrs. Biggs\u2019 real, after-inflation purchasing power\u00a0increased 3,658% over 32 years.\u00a0 If she started with $10 million, she ended with $376 million.\u00a0 And the fund was exceedingly tax efficient.<\/p>\n<p>Of course, this performance is a lot harder than it looks.\u00a0 Most people don\u2019t have the CIO of the Bank of New York picking their stocks, or a shrewd Street strategist pruning the portfolio.\u00a0 And&#8211;even more important&#8211;it is<strong> not easy to stay fully invested<\/strong> through the 13.5% inflation of 1980, the scary 1980-82 back-to-back recessions, the 1987 stock market crash, the 1991 real estate crash, the 1998 Asian financial crisis, and the tech bust of 2000-2003. That said, it is actually not that difficult for most investors, with the help of a knowledge advisor, to successfully follow a similar strategy.\u00a0 The <strong>five keys\u00a0to success<\/strong> are to steadfastly stick with sensible stocks, diversify across industry sectors,\u00a0not go off on faddish tangents, sell your losers not your winners, and judiciously buy the leaders in dynamic new industries.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Wall Street superstar Barton Biggs, who died last week, was\u00a0 one of Morgan Stanley\u2019s high-profile equity strategist, appearing regularly on CNBC and in\u00a0Barron\u2019s annual \u00a0investment roundtable.\u00a0 Unlike many sell-side big shots, he actually invested in the stock market.\u00a0\u00a0 Biggs eventually &hellip; <a href=\"https:\/\/www.wallstreetandkstreet.com\/?p=73\">Continue reading <span class=\"meta-nav\">&rarr;<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[24,23,8],"class_list":["post-73","post","type-post","status-publish","format-standard","hentry","category-uncategorized","tag-history","tag-investing","tag-stock-market"],"_links":{"self":[{"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/posts\/73","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=73"}],"version-history":[{"count":4,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/posts\/73\/revisions"}],"predecessor-version":[{"id":268,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=\/wp\/v2\/posts\/73\/revisions\/268"}],"wp:attachment":[{"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=73"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=73"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.wallstreetandkstreet.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=73"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}