Cliff Asness from AQR in recent FT Interview
“I’m sure you saw David Einhorn’s [comment that] the market is so inefficient you can’t make money. I agree that maybe things are a little less tethered to reality today. But I do find it odd to say: “My job forever has been identifying errors, and now errors are so big I can’t make money.” It can change the timeframe and how much pain you have to go through. But if your job is taking the other side, if you can stick with it — obviously a rather large if — it should be more lucrative.”
In our view, the other variables include:
- Time Horizon – your own mental state in handling the “higher than necessary” deferred gratification and the difficulty in identifying and partnering with clients who have a similar thought process and time horizon.
- Not solely relying on the magic of mean reversion, given the issues with #1.
There are not terribly complicated tools that public companies can use to narrow a valuation gap if you are producing the fundamental goods but are not getting the love: good capital allocation, intelligent compensation plans, a good corporate governance structure and proper investor relations that speaks to investors like business partners rather than a group of quarterly stock jockeys jacked-up on Adderall.
We have an “active” tool-kit which does not involve shouting how incompetent you are in every public forum we can think of. Rather we are actively offering strategic advice, bodies for boards and management, comp plans, explanations of basic corporate finance, M+A from the “money, not banking” standpoint and investor relations help. In the words of the great sage, Farmers Insurance Advertising Team, “We know a thing or two because we have seen a thing or two.”
We do this mostly behind the scenes on mostly an invite-only basis, which is also not a bad screening tool. If a management team or Board is freaking out that we would like to engage as partners, it is usually indicative of some deeper seated issues that are highly correlated with non-shareholder oriented motivations.
While this mindset applies to our entire portfolio, we also started CSC Partners 2.5 years ago to focus on “the handful” where we are invited to be actively engaged. Operators are standing by.
Yes, in a perfect world, we wake up every day with a handful of wonderful businesses with enlightened management and we can focus on lunch choices or trying out enlightened strategies to better engage with our kids. It’s not a perfect world.
