9. Clash of civilizations imminent?: “Economic hardship is another piece of the puzzle governing the extent to which violent extremism takes hold of societies. Europe, in part because of the unintended (but entirely predictable) effects of the euro currency union, is in its seventh year of economic stagnation. Unemployment and underemployment are high, especially among the region’s youth. This economic environment is a foul ground in which anger and racial, religious and ideological hatreds flourish. Such an environment does not constitute firm ground on which a strong economic recovery can be based. Jews (the populace which often bears the brunt of an upsurge of xenophobia and societal anger) are leaving France in sizeable numbers, and will continue to do so if they do not feel safe and protected. A similar scenario may also result in other countries as well. If terrorism and the concomitant struggle between radical elements of Europe’s Muslim populations and the states within which they reside intensifies, do you think that business expansion will be hampered, canceled or just not planned? We think the answer lies somewhere on that spectrum. Whether that will happen is anyone’s guess. The prospects are very unclear at present.”
Singer also said “we do not think this optimism is warranted, and we think a lot of the data is cooked or misleading” in his previous investor letter. These statements don’t seem to be coming from an extremely successful hedge fund managers. They seem to be coming from a paranoid, delusional, fear-mongering TV talking head. Don’t be fooled by these statements though. Paul Singer actually makes money and delivers strong returns to his investors by taking charge when he is invested in a stock. He doesn’t leave things to chance a lot and he is a bulldog when it comes to going after self-serving CEOs and boards. We get hints of this in his investor letter too:
“Every money manager makes mistakes in the course of a career. Sometimes the mistakes are isolated, and sometimes they come in bundles or waves. It is not necessarily fewer mistakes or a perfect process that accounts for Elliott’s consistent track record. Rather, we think that a strategic factor is very important in minimizing the impact of such miscues.
We are referring to the pursuit of “manual” situational trading (activist equity, hands-on participation in bankruptcies, and activist event arbitrage), as well as process-driven trading (in areas where process, not the value of businesses, drives the result) in which there is commonly an opportunity following a mistake to dig oneself out of the hole, move in another direction, and impact the situation so as to minimize the loss from the mistake or turn it into an opportunity for profit.
By contrast, outright directional investing does not present these opportunities. If one has an outright passive directional bet that goes sour, you can add to the position or subtract from it, but you are not as likely to be in a position to influence the result and turn it around. Of course, Elliott takes on some passive directional trades, but wherever possible we try to orient our capital toward situations whose characteristics give us the opportunity to lift ourselves out of mistakes.
This observation leads to a discussion about the quality of positions. We try at Elliott to evaluate potential holdings not only for their raw risk and reward probabilities but also on quality as we define it. Furthermore, our team is trained never to “fall in love” with a position or idea, but to be ready to change their minds on a dime if the facts change or a better analysis is presented.
At the top of the quality scale is a completely process-driven uncorrelated position that enables us to be active and control the process. We do not mean that such positions have the best profit potential or even the most attractive risk-reward profile. Nevertheless, lack of correlation with stock and bond markets reduces the need to hedge with unrelated instruments, and such positions frequently present opportunities for us to control our destiny. We like those situations the best.
At the bottom of the quality scale is an outright directional position with no opportunity to change directions if we make a mistake. We embark on such trades where the economics are compelling and the risks are known and manageable, but when sizing them, we take into account their “quality” characteristics, as well as the extent of other such positions in the portfolio as a whole.”
To summarize, we are putting up with Paul Singer’s ramblings because he is a very good activist investor. If you had placed equal dollar amounts to each of Singer’s top 5 stock picks and update your portfolio quarterly as Elliott filed its 13F, you would have returned 1% per month between 1999 and 2012, vs. 0.29% monthly gain for the S&P 500 Index. Investing in the top 5 stock picks of Paul Singer returned even more between 2008 and 2012: 1.26% per month vs. 0.29% for the S&P 500 Index. Did you notice that these returns are much better than his actual returns? That’s because you aren’t wasting your money on hedge fund fees or unnecessary hedges. So, what are Paul Singer’s top 5 positions today? You can check out Paul Singer’s moves on this page. Soon we will introduce free, real-time email alerts so that you get to see the changes as soon as they happen. Don’t pay hedge funds an arm and a leg when you can imitate their best stock picks and outperform their returns all by yourself.