In his recent interview with Morningstar, David Herro discussed why increased volatility and price dislocation is great for long-term value investors. Here’s an excerpt from the interview:
Herro: The competitive landscape sure has changed. Because when I look… when I first got into this business in 1986, it was mostly the big pools of money were pensions, defined-benefit pension plans, trust companies, insurance companies, long-only, buy-and-hold types of investors. Yes, you always had the traders on the side, stock flippers.
But the big way to money it seems gradually has changed through the years to where today the big way to money is on hedge funds and people using leverage and index funds and funds that represent everything from cryptocurrencies to SPACs to whatever. So, the competitive landscape certainly has changed.
And, actually, it’s brought more volatility and more imperfect price discovery, which, actually as a long-term value investor, is better for us. Because when you have more volatility and more size, chasing themes and ideas and less chasing fundamentals, for an investor who focuses on fundamentals, it actually becomes a positive.
Now the negative is, in the short term, this might really cause you to look silly. You might really be out of sync, and your clients who may be impatient or have a shorter-term investment horizon may not appreciate the fact that we are trying to take advantage of these market imperfections and volatility to enhance medium- and long-term return, because they are worried that they’re not going to get the short-term return. And so, it’s a two-edged sword.
On the one hand, it provides more opportunity–the changing nature of who’s holding assets, and what’s causing volume creates more opportunity for the bona fide long-term investor. But on the other hand, it might create some severe downward price dislocation, as you saw with value investors in 2018–and ’98, by the way–but in 2018, and in the first quarter of 2020.
And instead of investors thinking, “My manager is a good solid long-term investor with a good track record. I’m going to give them some more money to take advantage of this situation” They often become scared and sell right at the wrong time.
So, the good news, is it provides more opportunity for long-term investors. I think the bad news is sometimes this comes with more volatility, price dislocation, which, again, provides you a tool to harness to exploit market imperfection. But, on the other hand, it’s painful while you’re going through this. And at times, your client base doesn’t appreciate the short-term negative price performance.
You can listen to the entire interview here:
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