As I am a bit of a curmudgeon, one of the highlights of my weekend is picking Barron’s up off my front steps and reading the column by master curmudgeon Alan Abelson. Mr. Ableson’s prolonged absence earlier this year had me quite concerned and since his return, I have read with a new appreciation. Also, and this is a completely superfluous bit of name-dropping, Mr. Abelson and I went to the same high school. Of course, being a half century apart, I never met him, though I suppose we’d belong to the same alumini association if I ever bothered to pay my dues. Not only that, but at my graduation, they picked the other long-time columnist alumnus with the same initials to speak.
I was particularly pleased to see another investor referred to as “inelegant” in Abelson’s column this week. Abelson quotes from the latest quarterly letter from famed investor Jeremy Grantham. Grantham is the founder of GMO and his commentary is available at gmo.com after free registration.
In his most recent letter, Grantham has a wonderful piece continuing a previous discussion on the shortcomings of volatility as a measure of risk. In his previous piece, he described how
In the long term, volatility seriously overstates the risk of equity ownership because it ignores the strongly mean-reverting tendencies of both economic fundamentals and the stock market. That is to say, bad times fairly reliably follow very good times, and vice versa. Conversely, in the short term, volatility, at least as typically used, tends to understate risk by underestimating both the extreme nature of short-term outliers in real life and the occurrences of extreme events not hitherto experienced.
In his latest missive, Grantham provides data which demonstrates that low beta stocks have consistently outperformed high beta stocks. He then explains what might be the cause of this counterintuitive conclusion. Grantham posits that growth stocks have lower “career risk” and illustrates what he means with an anecdote:
In our earlier years at Batterymarch, the investment firm that Dick Mayo and I co-founded with Dean LeBaron, we lost 50% in the 1973-74 decline (almost identical to the losses of the big banks with their Nifty Fifty stocks). But we lost far more business and nearly failed because, as one client brilliantly put it, we lost our 50% â€˜inelegantly.â€™ Great Lakes Dock and Dredge, Hartford Steam Boiler, and Twin Disc Clutch made clients feel much worse, apparently, than losing the same money in Avon, IBM, and Johnson & Johnson. It is my opinion that this is one of the central truths of the investment business. Stocks and assets that make investors feel uncomfortable even if they are less risky will always have to return more than appealing, currently successful, and exciting companies. Owning the latter, and explaining why you do, is simply a better business proposition.
Fortunately for me, I have no clients to please, but the temptation of “exciting” stocks still takes work to avoid. Inelegant investing isn’t always easy, but I’ll continue to prefer higher long term returns to short term thrills.