2000年第一季度量化回顾

Grantham, Mayo, Van Otterloo & Co. LLC First Quarter 2000 Quantitative Review Jeremy Grantham Irrational Exuberance in the U.S. Equity Market The Rise and Fall (and Rise and Fall and Rise and Fall . . . ) of Puma Technology Much to the surprise of at least a few, the world didn’t come to an end with the beginning of the new millennium. In fact, the world looked very much like the same place it was in late 1999. In the first quarter, the U.S. equity market continued down the path it had been going. Technology stocks completely dominated all other sectors of the market, with euphoria spreading to smaller, more speculative issues and reaching levels probably never seen before. An old friend of mine, for example, had been fortunate 5 years ago in acquiring 140,000 shares of Puma Technology at 25¢ a share in a venture start-up. As it came public he gave the stock in trust to his seven children – a generous gift that was worth $200,000 in July, an improbable $6.2 million in early March this year at $41 per share (great generosity indeed!), and an even more improbable $102 per share in mid March. Today, 4 weeks later, it trades down 80% at $20¼ per share. In case one is tempted to believe that this reflects considered re-evaluation of great fundamental changes, consider the facts of terrible Tuesday, March 4th. In the last 3 hours the stock rallied with the rest of NASDAQ, in this case by almost 70%, to close down less than 1% for the day, having fallen over 40% in the morning on no news! At its peak worth $14 billion on $24 million in sales, the stock represents the epitome of the greatest speculative market in U.S. history. It is hard for serious people to believe that price can be so independent of underlying reality, but it was not hard for John Maynard Keynes. The most influential economist of the 20th century was a sophisticated and experienced investor, and he understood the nature of bubbles and psychology in investing. He wrote in his The General Theory of Employment, Interest and Money in 1936, “A valuation, which is established as the outcome of the mass psychology of a large number of ignorant individuals is liable to change violently as the result of a sudden fluctuation of opinion due to factors which really do not make much difference . . . since there will be no strong roots of conviction to hold it steady.”

That is a perfect description of the NASDAQ and Puma in the last few months, and one of many proofs to me that Keynes was more than 65 years ahead of the academic world in understanding equities. Only the leading few now begin to approach him after the efficient market nonsense of the 1970s and 1980s still taught at MIT.

More than 60 years ago, Keynes used the (somewhat insulting) analogy of children’s games, including Old Maid and Musical Chairs to describe investor behavior in the stock market. In Old Maid, the way to win is to pass along the Old Maid (or shares of Puma Technology) to the next player. You will hold it for a while even though you know it is inherently unattractive in the hopes that you can pass it off to someone else. Similarly, in Musical Chairs, you keep playing until the music stops and hope that you can scramble for a chair before someone else does.

Keynes is as critical of professional investors as he is of amateurs. Another of his analogies likens the behavior of professional investors to participants in a beauty contest in which the goal is not to choose the 6 out of 100 faces that you find the most attractive, but to find the 6 out of 100 that most closely match to what the general public finds most attractive. “We devote our intelligence to anticipating what average opinion expects the average opinion to be.”

The example of Puma, and many others like it, is the by-product of a spectacular beauty contest. No fundamental explanation can account for the changing stock price of Puma. The price fluctuations are solely attributable to the infection of casino mentality in the stock market. Keynes was remarkably prescient in his ability to describe the U.S. equity market some 60 years later. Relevant excerpts from his book, The General Theory of Employment, Interest and Money, are attached.

In the first quarter, success went to investors who best understood the beauty contest mentality of the market. With the abandonment of fundamental principles on which valuations reside, the market became a two-tier market the likes of which we have never seen before. On most measures, the valuation spread between growth and value stocks was in March at least as wide as it was in the early 1970s – on some measures, it has reached the highest levels recorded.

The Premature Death of the Value Manager There were victims to the atmosphere of irrational exuberance. As technology stocks continued their dizzying ascent, the pressure on value managers intensified. The first quarter was brutal for investors who paid attention to things like company fundamentals, price earnings ratios, book value, dividend yields, indeed, any of the basic yardsticks that have been used historically to provide a measure of value. All an investor needed to invest profitably in the first quarter was optimism.

The first part of 2000 has been remarkable in that some of the country’s – no, the world’s – most prominent value investors threw in the towel. This illustrious group included George Vanderheiden (Fidelity), Gary Brinson (Brinson/UBS ), Tony Dye (Philips and Drew) and, most recently, Julian Robertson (Tiger) who, having been significantly underweight in technology stocks finally closed his remaining hedge funds. Value managers are fast becoming a rare species.

We are fortunate in that our independence as an investment firm allows us to speak candidly about our views of the market, and to invest in strategies that we believe will best lead to profitable long-term investing for our clients. While in the short term, we may lose the beauty contest, our ability to resist the pressure to conform will ultimately accrue to the benefit of our clients.

Notable Bulls and Bears For obvious reasons, I have spent considerable time in the last 4 years reviewing the works of the best students of the stock market. Benjamin Graham understood value investing better than any other, as excerpts from Security Analysis that we last included in our year-end letter indicated. John Maynard Keynes, on the other hand, understood momentum or beauty contest investing perfectly. Interestingly both of these men got to the heart of value and momentum, the essence of the market, in 1936.

For a more recent appraisal of current market conditions, a new book by Yale professor Robert J. Shiller entitled Irrational Exuberance provides an exceptional dissertation on the psychological impact in the U.S. equity market. Shiller provides a compelling case to reach the conclusion that the market is both extremely inefficient and significantly overvalued.

Also firmly ensconced in the bear camp is Franco Modigliani, the Nobel Prize winner. In 1982, Modigliani had the foresight to recognize that the market trading at eight times earnings was ridiculously cheap because the market was inefficient and exaggerated the importance of high inflation on stocks, which were real assets and should not in his opinion have been severely reduced in value. Visiting a Boston quantitative group last month, Modigliani made it clear that low inflation, for the same reason, should not have inflated the market’s p/e to 32x, and that at this price it constitutes a ‘major bubble’. Modigliani, based purely on trained economic thought, has managed to make two brave contrarian calls.

Last, Andrew Smithers has recently published a book Valuing Wall Street: Protecting Wealth in Turbulent Markets, which is a merciless and complete grinding of the bull market case. His view, based on Tobin’s Q, is that equity prices will fall a lot. He also wrote an amusing and relevant short piece in the London Evening Standard, which is attached.

Heavyweight academic bulls are more difficult to find. Among them are hosts of “stockbroker economists”, as Smithers calls them, whose views have to be suspect. Robert Merton, another Nobel Prize winner, is perhaps the heaviest artillery for the bulls. He is a leading proponent of efficient markets and the argument that however high or low the market, it is the best, wonderful working of the smartest, best informed minds – a view at long last steadily losing credibility. And even his credibility must be discounted by his involvement in Long Term Capital. It is a strange irony that the belief that markets are efficient led to the ultimate collapse of his firm.

Outlook The ground certainly feels like it is beginning to shake. The NASDAQ as of this writing is off by a third. Industrial stocks, especially value stocks, are also off, but by much less. It is impossible, in our view, to predict whether we are at the beginning of a long-term recovery to value, but at least we see how air has rapidly deflated from the Internet bubble. If history is a guide, then we would expect to see a long-term relative return to value of more than 80%! The following chart shows theoretical and actual returns to value stocks in the U.S. when they were cheap by historic measures. The theoretical return incorporates both the expected return from a reversion to average price-to-book and a return of 3% per year as an imbedded component to investing in value stocks.

While we have had “false starts” to a value rally before, there is a difference this time. Alan Greenspan, who previously championed the expansion of the stock market bubble by keeping money loose and by taking no actions adverse to the market, like increasing margin requirements, has been much more proactive recently in trying to deflate the bubble. Five interest rate increases, with more to come, may finally put the brakes on the run-away market.

We believe as fervently as ever that this recent market turmoil has not created a long-term buying opportunity for equity investors. The timing remains uncertain, but there is no doubt about the ultimate outcome. The savings rate, currently less than 1%, must eventually increase. Higher interest rates will eventually lead to a lower trade deficit and higher savings rate. A less benign economic environment will surely envelop us, although we hope and expect it to be merely subaverage rather than disastrous. It is not too late to rebalance portfolios in favor of value stocks, small stocks, REITs, bonds, emerging equities, and, where portfolio liquidity constraints allow, timber. Market neutral long-short strategies are also a compelling alternative. Our long-term outlook remains intact.

April 24, 2000 EVENING STANDARD BUSINESS DAY MONDAY, 13 MARCH 2000 ANDREW SMITHERS Chairman of fund manager Advisers Smithers & Co.

THE OLD economy is suffering from a Even after its recent recovery it is still bear market, while the new has hit new no higher than it was 15 years ago and heights. This has upset Sir John Banham. half the level it reached at the end of The former director-general of the 1989. If we want fund managers to Confederation of British Industry blames prefer value to fashion, we must judge fund managers. They are, he thinks, their performance over decades rather incompetent lemmings. than years.

Lemmings are notoriously dedicated to Fund managers have had a very hard fashion. According to the popular myth, time recently. To perform well they have if it is fashionable to leap to your death had to buy shares for which a rational only lemming wimps fail to leap. Sir case is either difficult or impossible. John is, I think, quite correct in noting Momentum investors have been the big that fund managers are being fashion winners in recent years. These investors conscious in their actions as well as buy shares because they have gone up their dress. (To be “the class of fashion more than others. and the mould of form”, you must dress It is not easy to make a rational case down today rather than up. Silicon for buying shares that have gone up a Valley rather than the Prince of lot, unless there is some new information Denmark is today’s model.) to justify the price rise. But, all too often, Sir John is, however, probably less fair the only new information is that the in blaming fund managers for their share price has risen. If fund managers attachment to fashion. Most fund don’t buy shares that have already shot managers are well aware that the up, they fear they will underperform. If market has gone bananas. What they they do, and the market crashes, they do not and cannot know is when the fear they will be blamed for madness will end. If they are going to recklessness. stand out for sanity they must have There is thus a huge new demand for stalwart clients who will back their excuses. It is a form of insurance. The judgment even if the result is poor fund managers’ biggest need today is for performance over a number of years. reasons to justify the unreasonable. Unfortunately, such clients are rare. It Supply has risen to meet this demand. is, therefore, more reasonable to blame The number of irrational arguments the clients than the fund managers. around must be approaching a world Furthermore, it should be remembered record. that the clients are very largely the Those who stand out against this pension funds of those old economy trend are unlikely to prosper. Although companies that are currently being the prices of shares in the new spurned by the stock market. economy are dotty, it is doubtful if any The market can go mad for a long are cheap. The moral is simple. If you time. Many people, quite correctly, want to invest don’t be rational and if pointed out that the Tokyo market was you want to be rational don’t invest. overpriced four years before it peaked.

Excerpts taken from: Keynes, John Maynard. The General Theory of Employment, Interest, and Money. New York, Harcourt, Brace & World, 1936.

Reprinted as part of the Great Minds Paperback Series by Prometheus Books, 1997 (New York) CHAPTER 12 THE STATE OF LONG-TERM EXPECTATION “Day-to-day fluctuations in the profits of existing investments, which are obviously of an ephemeral and non-significant character, tend to have an altogether excessive, and even an absurd, influence on the market. It is said, for example, that the shares of American companies which manufacture ice tend to sell at a higher price in summer when their profits are seasonally high than in winter when no one wants ice.“ “A conventional valuation which is established as the outcome of the mass psychology of a large number of ignorant individuals is liable to change violently as the result of a sudden fluctuation of opinion due to factors which do not really make much difference to the prospective yield, since there will be no strong roots of conviction to hold it steady. In abnormal times in particular, when the hypothesis of an indefinite continuance of the existing state of affairs is less plausible than usual even though there are no express grounds to anticipate a definite change, the market will be subject to waves of optimistic and pessimistic sentiment, which are unreasoning and yet in a sense legitimate where no solid basis exists for a reasonable calculation.”

“ . . . It might have been supposed that competition between expert professionals, possessing judgment and knowledge beyond that of the average private investor, would correct the vagaries of the ignorant individual left to himself. It happens, however, that the energies and skill of the professional investor . . . are mainly occupied otherwise. For most of these persons are, in fact, largely concerned, not with making superior long-term forecasts of the probable yield of an investment over its whole life, but with foreseeing changes in the conventional basis of valuation a short time ahead of the general public. They are concerned, not with what an investment is really worth to a man who buys it "for keeps", but with what the market will value it at, under the influence of mass psychology, three months or a year hence. Moreover, this behavior is not the outcome of a wrong-headed propensity. It is an inevitable result of an investment market organized along the lines described. For it is not sensible to pay 25 for an investment of which you believe the prospective yield to justify a value of 30, if you also believe that the market will value it at 20 three months hence.”

“Thus the professional investor is forced to concern himself with the anticipation of impending changes, in the news or in the atmosphere, of the kind by which experience shows that the mass psychology of the market is most influenced. This is the inevitable result of investment markets organized with a view to so-called "liquidity". Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of "liquid" securities. It forgets that there is no such thing as liquidity of investment for the community as a whole. The social object of skilled investment should be to defeat the dark forces of time and ignorance which envelop our future. The actual, private object of the most skilled investment today is "to beat the gun", as the Americans so well express it, to outwit the crowd, and to pass the bad, or depreciating, half-crown to the other fellow.”

“ . . . professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the prize being awarded to the competitor whose choice most nearly corresponds to the average preferences of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view.”

“It is not a case of choosing those which to the best of one's judgment, are really the prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligence to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.”

“If the reader interjects that there must surely be large profits to be gained from the other players in the long run by a skilled individual who, unperturbed by the prevailing pastime, continues to purchase investments on the best genuine long-term expectations he can frame, he must be answered, first of all, that there are, indeed, such serious-minded individuals and that it makes a vast difference to an investment market whether or not they predominate in their influence over the game-players. But we must also add that there are several factors which jeopardize the predominance of such individuals in modern investment markets. Investment based on genuine long-term expectation is so difficult today as to be scarcely practicable. He who attempts it must surely lead much more laborious days and run greater risks than he who tries to guess better than the crowd how the crowd will behave; and, given equal intelligence, he may make more disastrous mistakes. There is no clear evidence from experience that the investment policy which is socially advantageous coincides with that which is most profitable. It needs more intelligence to defeat the forces of time and our ignorance of the future than to beat the gun. Moreover, life is not long enough; human nature desires quick results, there is a peculiar zest in making money quickly, and remoter gains are discounted by the average man at a very high rate. The game of professional investment is intolerably boring and over exacting to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to this propensity the appropriate toll. Furthermore, an investor who proposes to ignore near-term market fluctuations needs greater resources for safety and must not operate on so large a scale, if at all, with borrowed money – a further reason for the higher return from the pastime to a given stock of intelligence and resources. Finally it is the long-term investor, he who most promotes the public interest, who will in practice come in for most criticism, wherever investment funds are managed by committees or boards or banks. For it is in the essence of his behavior that he should be eccentric, unconventional and rash in the eyes of average opinion. If he is successful, that will only confirm the general belief in his rashness; and if in the short run he is unsuccessful, which is very likely, he will not receive much mercy. Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”

*** “ . . . In one of the greatest investment markets in the world, namely, New York, the influence of speculation . . . is enormous. Even outside the field of finance, Americans are apt to be unduly interested in discovering what average opinion believes average opinion to be; and this national weakness finds its nemesis in the stock market. It is rare, one is told, for an American to invest, as many Englishmen still do, "for income"; and he will not readily purchase an investment except in the hope of capital appreciation. This is only another way of saying that, when he purchases an investment, the American is attaching his hopes, not so much to its prospective yield, as to a favorable change in the conventional basis of valuation, i.e., that he is, in the above sense; a speculator. Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. The measure of success attained by Wall Street, regarded as an institution of which the proper social purpose is to direct new investment into the most profitable channels in terms of future yield, cannot be claimed as one of the outstanding triumphs of laissez-faire capitalism – which is not surprising, if I am right in thinking that the best brains of Wall Street have been in fact directed towards a different object.”

“Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as a result of animal spirits- of a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities. Enterprise only pretends to itself to be mainly actuated by the statements in its own prospectus, however candid and sincere. Only a little more than an expedition to the South Pole, is it based on an exact calculation of benefits to come. Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die; though fears of loss may have a basis no more reasonable than hopes of profit had before.”

“It is safe to say that enterprise which depends on hopes stretching into the future benefits the community as a whole. But individual initiative will only be adequate when reasonable calculation is supplemented and supported by animal spirits, so that the thought of ultimate loss which often overtakes pioneers, as experience undoubtedly tells us and them, is put aside as a healthy man puts aside the expectation of death.”

“This means, unfortunately, not only that slumps and depressions are exaggerated in degree, but that economic prosperity is excessively dependent on a political and social atmosphere which is congenial to the average business man. If the fear of a Labor Government or a New Deal depresses enterprise, this need not be the result either of a reasonable calculation or of a plot with political intent; it is the mere consequence of upsetting the delicate balance of spontaneous optimism. In estimating the prospects of investment, we have regard, therefore, to the nerves and hysteria and even the digestions and reactions to the weather of those upon whose spontaneous activity it largely depends.”

“We should not conclude from this that everything depends on waves of irrational psychology. On the contrary, the state of long-term expectation is often steady, and, even when it is not, the other factors exert their compensating effects. We are merely reminding ourselves that human decisions affecting the future, whether personal or political or economic, cannot depend on strict mathematical expectation, since the basis for making such calculations does not exist; and that it is our innate urge to activity which makes the wheels go round, our rational selves choosing between the alternatives as best we are able, calculating where we can, but often falling back for our motive on whim or sentiment or chance.”

*** “In practice we have tacitly agreed, as a rule, to fall back on what is, in truth, a convention. The essence of this convention – though it does not, of course, work out quite so simply – lies in assuming that the existing state of affairs will continue indefinitely, except in so far as we have specific reasons to expect a change. This does not mean that we really believe that the existing state of affairs will continue indefinitely. We know from extensive experience that this is most unlikely.”