Special Dividends

I have a confession to make. I don’t read many books related to investing. Early in my career, when I was developing my investment philosophy, I was constantly reading investment books. However, as my investment process and discipline matured, I discovered I learned more from reading about companies. And there is a lot to read. There are times after a long day of reading SEC filings, transcripts, and other company-specific related material, my brain lets me know it’s had enough. I call it mush-head. When it occurs varies, but when mush-head hits, I know it’s time to stop reading and do something active or just relax. Reading a book is the last thing my mind wants to do.

Although I rarely read investment books, there are exceptions. Thanks to a reader of this blog, I’ve been reading The Education of a Value Investor, by Guy Spier. It’s about a hedge fund manager and his journey to becoming a successful value investor. It’s easy to read and entertaining. In the early chapters, Mr. Spier discusses his challenges at his first job and his decision to resign. Shortly after his departure, Mr. Spier discovers Tony Robbins, and unexpectedly admires and learns from him. As I was reading about the wonders of Tony Robbins, a paragraph hit me like a ton of bricks.

Mr. Spier writes, “Robbins hammered into my head the idea that, if you want to go somewhere, anywhere, and you’re stuck, ‘Just Do It! Just make a move. Any move!’ This might seem obvious to many. Hell, it was obvious to me. But my bias toward analysis-paralysis meant that it was easier for me to pontificate in a library than to act.”

Just make a move. Any move. That really struck a chord with me. I immediately thought of my experience last year when I was sitting alone in my office making one of the most important decisions of my career.

I was in the process of wrapping up a very  difficult and contrarian position – the precious metal miners. Owning the miners was one of the most painful and lonely investment experiences I’ve ever endured. Possibly more painful than refusing to buy tech stocks in 1999. If you want to know what it feels like to be a contrarian, I suggest owning precious metal miners in a devastating and relentless bear market (many miners were down 80-90%). I’ve seen some hated stocks in my career, but nothing comes close to the hatred of the miners, absolutely nothing. If toxic waste went public, it would have traded at a premium to the miners in 2014-2015.

It was a long and painful road, but eventually the precious metal miners appreciated significantly in 2016 and approached my estimated fair value. As I began selling the miners, cash levels increased from an already high and uncomfortable level. While I was thrilled to be closing out a very challenging position, I was suddenly confronted with a new problem. The precious metal miners  were the portfolio’s largest position and the largest discounts to value. With their stocks rising sharply and their valuation gaps closing, I no longer had sufficient discounts in the portfolio. How could I generate attractive absolute returns in the future with 90% of the portfolio in cash yielding nothing and 10% in equities trading near fair value? I was stuck, and as Tony Robbins would advise, I needed to make a move.

I felt I had two options. I needed to either find a way to get invested or recommend returning capital to clients. After running numerous small cap screens and going through my possible buy list for the hundredth time, it became very clear to me, I was not going to be able to find a suffient number of attractively priced small cap stocks. It was at that time I made my move. A little over eight months ago I recommended returning capital to clients and stepped away from the asset management industry and my dream job of managing an absolute return portfolio.

Reaching a 90% cash position and recommending returning capital was never my plan. My plan was to manage the absolute return portfolio I had been running since 1998 until I was too old to remember my name. I had a personal goal of generating 50 years of attractive absolute returns for friends and clients. Although things didn’t go according to plan, I was still able to generate 18 years of attractive absolute returns (and relative returns if that floats your boat), successfully navigate through two epic asset bubbles, and pick up a couple Lipper Awards along the way (to be fair, if there was a Toilet Bowl Award, I probably would have won a few of those too – 1999, 2003, and 2013 come to mind!). Not too shabby I suppose, but an uninterrupted 50 years in the industry would have been quite an achievement.

I badly wanted to help friends and clients get through the third asset bubble in my career. However, as mentioned in past posts, today’s market cycle is very different than the bubbles of 1999 and 2007 – the overvaluation is so much broader. This cycle’s asset inflation has infected almost every asset class and stock I consider for purchase. As such, I believe my options are significantly limited. In my opinion, the best move at this stage of the market cycle remains being patient and flexible. In effect, it was my decision to move to 100% cash — for an extended period if necessary — that drove my decision to recommend returning capital and stepping away from the industry.

So how has stepping away worked out? So far Tony Robbins was right. Making a move, any move, was a good move. Although my decision to recommend returning capital was driven by overvaluation and my desire to go “all in” on patience, there were more important reasons and benefits that I was unaware of at the time. For example, I’ve been introduced to many like-minded investors I would not have met otherwise. My blog has turned into a support group of sorts. Being a contrarian and investing differently can be very lonely, especially during the later stages of a market cycle. It’s not now. The support has been tremendous and very much appreciated.

While once thought to be near extinction, I’ve been pleasantly surprised by how many absolute return investors continue to roam the investment landscape. There are even more of us than there appears, as there are a number of absolute return investors trapped in relative return mandates and organizations. In fact, if we polled all active asset managers, I suspect we would learn that many would prefer managing money in an absolute return manner. However, due to business and career risks, they are forced to tow the relative return line. I’m convinced absolute return investors are the silent majority of professional investing — silenced by the goal of retaining and growing AUM (assets under management).

Another benefit of taking time away from the industry includes a flexible schedule. I’m still performing the same tasks, but going about it differently. For example, instead of sitting behind a desk, I’ll often listen to conference calls while taking long walks. I’m also monitoring the markets and news less frequently, which has improved my focus and increased productivity. I exercise more. I’ve been working out, I’m huge (kidding…another joke for Seinfeld fans). I’m also meeting more people outside of the industry. While walking my dogs at lunch, I met an elderly woman who likes to tell dirty jokes. The first couple of jokes were uncomfortable, but now I look forward to them. They’re pretty clever and funny. I’ve discovered most people couldn’t care less about central banks and inflated asset markets – the diversity in thought and conversation has been refreshing. And last, but not least, I’ve reached “Gold Status” at Starbucks (includes free refills and a free drink on your birthday) – one of my finer achievements!

While I’ve benefited from getting out of the office routine, the greatest benefit, by far, has been the extra time I’ve been able to spend with my family. I know this sounds corny and overplayed, but it’s true. I can’t remember how many press releases I read over the years regarding management changes that stated, “CEO stepping down to spend more time with family.” I would roll my eyes and say, “Yeah, right, I wonder what went wrong.” I was the one who was wrong. I get it now. I didn’t get it when I was full throttle into my career. I was blind.

Although I felt like I was spending plenty of time with my family, looking back, I wasn’t always there. My mind was often still at work. And some of the time wasn’t quality time. Most weekends I’d bring the kids to the office so I could sneak in a little extra work. I’d put my son on my lap. He’d watch Thomas and Friends on the right screen and I’d have Bloomberg on the left screen. Whether at work or at home, I was constantly thinking about the markets, the economy, and the companies I follow. I didn’t realize how much work had taken over my life. I was an investment junkie.

Thank goodness for Bernanke and Yellen’s asset bubbles and their prohibition of investing (as I define it). Without their “temporary” 8-years and counting emergency monetary policies and all-inclusive asset inflation, I’d still be at my desk encompassed by my career with my blinders on.

I continue to plan to return to the investment management industry. I’m going to run a portfolio again and I’m looking forward to it. However, the time I’ve taken away has been invaluable. I’ve learned about the importance of being balanced and the risk of being overly submerged in one’s profession. I’ve also learned a lot about uncertainty – it’s not as scary as I thought. It’s been the exact opposite. Things seem clearer to me than ever.

If you feel stuck and you need to press the refresh button, making a move, any move, may be something to consider. Until you make the move, it’s easy to only see the risks and it’s difficult to see the potential benefits. But the benefits are there. They’re in front of you.