Value trap and being contrarian

Consensus can be right for a long time — ride it while reflexivity is reinforcing it, but be ready to turn contrarian near the inflection point.

It is not “always go against consensus.”

George Soros says the crowd is right 80% of the time.

“Most of the time I am a trend follower … Only at an inflection point are we rewarded.”

His key idea is reflexivity: market prices are shaped by investor bias, and those prices can then affect fundamentals, creating boom-bust loops. So the contrarian opportunity is when the market’s “prevailing bias” has gone too far and starts to reverse.

Being contrarian for most of the time is dangerous.


Being contrarian in investing for too long can be dangerous.

On the upward trend, if you are against the trend and short the stocks, Tiger Mgmt is a case in point – Tiger Management, run by Julian Robertson, effectively shut down in March 2000, right as the dot-com bubble was peaking.

Robertson was acting like a classic contrarian:

  • “These internet stocks are absurdly overvalued.”
  • “Eventually fundamentals will matter.”

Both statements were true.

But Soros would likely argue that Robertson fought the trend too early. A reflexive bubble can become much larger than valuation alone would justify.

On the downward trend, if you are against the trend and long the stocks, there is a term called “value trap”.

Sometimes the crowd is right: the business is structurally deteriorating, ROIC is falling, or the terminal value is lower than historical multiples suggest.


For value traps, the key question is not “is it cheap?” but:

What changes the prevailing trend?


In the case of investing and cigar butt investing like what Warren Buffett did in his early days, he bought near/below liquidation value.

In addition, he had an exit path.

Cigar-butt investing often worked through liquidation, tender offers, buybacks, asset sales, control pressure, or mean reversion. It was not “this bad business will become great.”

So Buffett avoided value trap with asset/liquidation value protection + catalyst/control.


That is even harder in China, as there is little space for an activist in China investing.

Howard Marks’ fallacy

In his book The Most Important Thing Illuminated, Howard Marks wrote this –

Our goal isn’t to find good assets, but good buys. Thus, it’s not what you buy; it’s what you pay for it.

Obviously there is merit to this. Warren Buffett 1.0 could agree with Howard Marks here.

But clearly this contradicts with Charlie Munger and Warren Buffett 2.0, who are willing to pay fair price for good assets.

The “fallacy”, if any, could origin from Marks’ expertise in distressed debts.

A huge difference between equity and debt is that debt doesn’t have unlimited upside.

Debt’s blue sky scenario is limited – receive full payment in interests and face value. Thus price is extremely important.

Equity could have “unlimited” upside for a good company. These good assets have unlimited upside, which makes paying fair price a good deal.

That unlimited upside makes the additional 10% or 20% discount in entry price less relevant.

 

Living in the Future (Earnings)

第四季的 The David Rubenstein Show 里,Tim Cook 和 Jeff Bezos 分别的不同程度讲到了同一个问题。

Tim 的角度是 David 问他在不在意每个季度财报时候的 iphone 销量;Jeff 也是类似,被问每个季度的财报。

虽然或多或少会在意?但他们的回答都是不看重当前的季度,而是着眼于未来。当前季度的财报可能两三年前就被预料到。他们活在未来的1-3年,他们要做的事、在做的事是影响公司以后的 earnings (乃至社会和人类的发展)。

这是未来推演的能力以及能给未来找到solution的能力。

每个职位对于各项能力的要求都不一样。Apple 和 Amazon 的 CEO,很需要这个能力。政府领导人更是需要。这是极其艰巨复杂的问题,并且仅有极少的素材可以学习。我们才刚刚起步,我相信未来会有越来越多的人有这方面强大的能力,这样才能带着这个物种以指数级前进。