®
Vol. 13, No. 19a
Two Wall Street, New York, New York 10005 • www.grantspub.com
OCTOBER 13, 1995
Same country, same currency, new plot
Mexico has earned the respect of every comfort-loving industrialized nation
by surviving the rigors of a 43% inflation
rate, a 39% treasury-bill rate and a set
of mortgage interest rates that range as
high as 100%. In the United States, any
one of these privations might cause J.P.
Morgan & Co. to finance a Bernie Sanders presidential campaign.
The ordeal continued Monday in
Washington as the Mexican people
were subjected to the praise of the
Clinton administration for producing less, buying less and eating less. A
U.S. official, who would not be named,
declared: “The damage has been contained.” An official who did speak for
the record, Larry Summers, deputy
Treasury secretary, congratulated the
Zedillo administration on its timely repayment of some $700 million to the
Treasury, part of the $12.5 billion loan
that the Zedillo government had taken
out earlier this year. Mexico, although
allegedly in possession of adequate
reserves, borrowed the $700 million
as it had earlier borrowed the $12.5
billion, but this time the capital markets lent freely (in the form of 1 billion
deutschernarks). Summers congratulated the Mexicans on the loan, which
was not a sign of need but “really a reflection of the markets’ increasing confidence in Mexico, which, in turn, has
been earned by the convincing policies
that the Mexicans have pursued.”
The truth of the matter, we think,
is that markets increasingly lack confidence. On Tuesday morning, even as
President Clinton was congratulating
President Zedillo on the belt-tightening prodigies that Zedillo wishes he
had never achieved, the peso was sold
down to a seven-month low; it has fallen almost 8% in the past month. The
bolsa, despite some recent strength,
is down by 11% or so from its highs
of last month, and the predicament
of the Mexican banks (and, of course,
their clientele) has continued to deteriorate. It is true, just as Summers
observed, that the bond markets have
reopened to Mexico, but that is less
a reflection on Mexico than it is on
the markets. The bond markets also
promptly reopened to Orange County,
Texaco, Marriott, RJR Nabisco, Hospital Corp. of America and other debtors, public and private, that offended
against the canons of law or taste in
their dealings with lenders. When the
sovereign state of Colombia set out to
raise $200 million in a new syndicated
loan the other day, the world’s banks
would hear of nothing less than $225
million (there were commitments, all
told, of $365 million). The interest
rate, over five years, was 1.25 percentage points over the wholesale cost of
dollar deposits, the lowest pricing for
a Latin American sovereign borrower
in more than a decade, according to
the Financial Times.
Markets can change their minds, of
course, and the bolsa and the Chicago
Mercantile Exchange (where a futures
contract in pesos is now traded) might
yet come to agree with Clinton. On
Tuesday, a trader declared that Mexican stocks were cheap; others have
pronounced the peso a bargain. What
we think is so telling about the current
bearish market mood, however, is that
it has passed almost unnoticed. According to a Dow Jones bulletin from London by Gene Colter on Tuesday, most
European investors are oblivious to it;
what was front-page news in The New
article-GRANT’S/OCTOBER 13, 1995 2
York Times the other day was not that
Mexico had borrowed the money with
which to make a partial repayment, but
that it had made a partial repayment.
The investment lesson we take
away from the Mexican crisis of 1994
(predicted in these pages, if we may
be indulged in remembering, by our
friend Gert von der Linde) is that a
developing country should always be
valued with an eye to calamity. Thus,
we think, Russia is the quintessential
emerging market because it is so wild,
so woolly and so cheap. According to
New York-based Firebird Fund, which
invests in it, Russian stocks—growth
companies by definition, unless the
country blows up—change hands at
multiples of one, two or three times
earnings. Repeat: earnings.
In Mexico, of course, there are hardly
any earnings for stock prices to multiply.
Mexican exporters, basking in the devaluation, have fared well enough, according
to Eduardo Uribe, a Standard & Poor’s industry analyst in Mexico City. “But then
you have the medium-size and small-size
companies—the interest rates are killing
them,” says Uribe. “All the money they
are making is being paid to interest expense, if they make any money, because
demand is still very, very low. Sales are
down significantly from last year.”
Interest burdens have climbed, naturally. According to S&P’s Credit Week
International, debt service has doubled
in relation to pre-devaluation income.
While reported past-due loans at the
major Mexican banks reached 12% of
total loans at June 30, S&P goes on,
“this figure understates the true extent
of substandard credit, which should be
over 30% when adjusted to U.S. accounting standards and including distressed reschedulings and loans that do
not pay cash interest.”
Every investor must choose between
bullish political rhetoric and bearish
price action. For ourselves, we would
be short the peso—and short the administration, too, if that were possible,
as a show of solidarity with the longsuffering Mexican people.
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Vol. 32, No. 22
Two Wall Street, New York, New York 10005 • www.grantspub.com
NOVEMBER 14, 2014
Read the footnotes
Vanguard Group Inc., which beats
the mutual fund industry by not trying to beat the stock market, attracted
more money in the first 10 months of
2014 than it did in any calendar year
of its storied 39-year history. Reciprocally, reports Monday’s Financial Times,
“fewer fund managers are beating the
market this year than at any time in
over a decade, piling further misery on
a profession that faces increasing investor skepticism.”
Costs, returns and fads are the topics under discussion. In preview, we
judge that passive equity investing is a
good idea. It is such a very good idea, in
fact, that it has become a fad. We are
accordingly bearish on it—bearish in a
cyclical way. We are bearish on passive
bond investing, too—bearish in a more
than cyclical way. And we are bullish on
security analysis—bullish in an unconditional way.
You can’t really argue with the Vanguard value proposition. Markets are
reasonably efficient, and information
is yours for the asking. Active managers, en masse, are not very good at their
jobs. Costs are therefore a critical determinant—the critical determinant,
Vanguard calls them—in achieving
investment success. A half-decade’s
worth of rising asset prices is the evidentiary icing on the cake. “Active
management has never been in worse
repute,” a man from Morningstar testifies. “This is the darkest of days.”
Many have helped to dim the lights.
We think of Fred Schwed Jr., progenitor of the efficient markets concept
in his wise and hilarious 1940 book,
“Where Are the Customers’ Yachts?”;
Burton G. Malkiel, author of the influential 1973 book, “A Random Walk
Down Wall Street”; Jack Bogle, who
launched the good ship Vanguard in
an increasingly expert and successful
1975; William F. Sharpe, author of
(or ‘efficient’) price discovery market
the 1991 monograph, “The Arithmemechanism. Because all have ready
tic of Active Management”; and most
access to almost all the same informarecently, Charles D. Ellis whose “The
tion, the probabilities continue to rise
Rise and Fall of Performance Investthat any mispricing—particularly for
ing” in the July/August issue of the Fithe 300 large-capitalization stocks that
nancial Analysts Journal initiated one of
necessarily dominate major managers’
Wall Street’s rare bursts of soul searchportfolios—will be quickly discovered
ing (nothing’s turned up yet).
and arbitraged away to insignificance.
“As we all know,” Ellis writes—“but
The unsurprising result of the global
without always understanding the omicommoditization of insight and infornous long-term consequences—over
mation and of all the competition: The
the past 50 years, increasing numbers
increasing efficiency of modern stock
markets makes it harder to match them
of highly talented young investment
and much harder to beat them—parprofessionals have entered the com®
ticularly after covering fees and costs.”
petition for a faster and more accurate
The hedge fund business makes an
discovery of pricing errors, the key
ironic star witness for Ellis’s case. In
to achieving the Holy Grail of supeTwo Wall Street, New York, New York 10005 • www.grantspub.com
22 ended in 2000, average
NOVEMBER 14, 2014
theNo.
decade
anrior performance. They have more ad- Vol. 32,
nual returns topped 20%, according to
vanced training than their predecesHedge Fund Research via a recent arsors, better analytical tools and faster
ticle in Institutional Investor magazine.
access to more information. Thus, the
In the five years to 2013, those annual
skill and effectiveness of active managreturns had dwindled to an average of
ers as a group have risen continuously
just 7.78%, as tallied by the HFR Fund
for more than half a century, producing
Weighted Composite Index. Individuan increasingly expert and successful
Vanguard
Inc., which 60%
beats
als whoGroup
tritely apportioned
of theirlaunched the good ship Vanguard in
(or ‘efficient’) price discovery market
the mutual
industry
by not
try- in a1975; William F. Sharpe, author of
money fund
to stocks
and 40%
to bonds
mechanism. Because all have ready
ing tolow-fee
beat theindex
stockfund
market,
attracted
achieved
an annualthe 1991 monograph, “The Arithmeaccess to almost all the same informamore return
moneyofin13.17%
the first
10the
months
of
tic of Active Management”; and most
over
same interval.
tion, the probabilities continue to rise
2014 than
in any
calendar year
Theit did
retired
hedge-fund
eminencerecently, Charles D. Ellis whose “The
that any mispricing—particularly for
of its Michael
storied 39-year
history.
Steinhardt
cameReciproto the phoneRise and Fall of Performance Investthe
300 large-capitalization stocks that
cally, the
reports
Monday’s
Financial
Times,
ing”
in
the
July/August
issue
of
the
Fiother day to discuss the reasons
necessarily dominate major managers’
“fewerhedge
fund funds
managers
beating
theof thenancial Analysts Journal initiated one of
haveare
fallen
so short
market
thismark
yearhethan
at any
timeThe
in fundWall Street’s rare bursts of soul searchportfolios—will be quickly discovered
high
helped
to set.
over athat
decade,
piling
further misery
on(it wasing (nothing’s turned up yet).
and arbitraged away to insignificance.
became
Steinhardt
Partners
a profession
thatSteinhardt,
faces increasing
The unsurprising result of the global
originally
Fine,invesBerkowitz “As we all know,” Ellis writes—“but
tor skepticism.”
commoditization of insight and infor& Co.) debuted in 1967. Over the nextwithout always understanding the omimation and of all the competition: The
Costs,
returns
and fads are
the top-annualnous long-term consequences—over
28 years,
it produced
compound
increasing efficiency of modern stock
ics under
discussion.
we profitthe past 50 years, increasing numbers
returns
of 24.5% In
netpreview,
of fees and
markets makes it harder to match them
judge reallocation,
that passive equity
a andof highly talented young investment
i.e., theinvesting
standardis1%
and much harder to beat them—pargood idea.
is such a very
good idea, insched-professionals have entered the com20% It
hedge-fund
remuneration
petition for a faster and more accurate
ticularly after covering fees and costs.”
fact, that
a fad. We observed,
are
ule. it
Athas
thebecome
start, Steinhardt
discovery of pricing errors, the key
The hedge fund business makes an
accordingly
on it—bearish
in Today,
a
“Hi, I’m rich. What’s your name?”
there bearish
were perhaps
10 funds.
to achieving the Holy Grail of supeironic star witness for Ellis’s case. In
cyclical way. We are bearish on passive
rior performance. They have more adthe decade ended in 2000, average anbond investing, too—bearish in a more
vanced training than their predecesnual returns topped 20%, according to
than cyclical way. And we are bullish on
sors, better analytical tools and faster
Hedge Fund Research via a recent arsecurity analysis—bullish in an unconaccess to more information. Thus, the
ticle in Institutional Investor magazine.
ditional way.
skill and effectiveness of active managIn the five years to 2013, those annual
You can’t really argue with the Vaners as a group have risen continuously
returns had dwindled to an average of
guard value proposition. Markets are
for more than half a century, producing
just 7.78%, as tallied by the HFR Fund
reasonably efficient, and information
Weighted Composite Index. Individuis yours for the asking. Active managals who tritely apportioned 60% of their
ers, en masse, are not very good at their
money to stocks and 40% to bonds in a
jobs. Costs are therefore a critical delow-fee index fund achieved an annual
terminant—the critical determinant,
return of 13.17% over the same interval.
Vanguard calls them—in achieving
The retired hedge-fund eminence
investment success. A half-decade’s
Michael Steinhardt came to the phone
worth of rising asset prices is the evithe other day to discuss the reasons
dentiary icing on the cake. “Active
hedge funds have fallen so short of the
management has never been in worse
high mark he helped to set. The fund
repute,” a man from Morningstar testithat became Steinhardt Partners (it was
fies. “This is the darkest of days.”
originally Steinhardt, Fine, Berkowitz
Many have helped to dim the lights.
& Co.) debuted in 1967. Over the next
We think of Fred Schwed Jr., progeni28 years, it produced compound annual
tor of the efficient markets concept
returns of 24.5% net of fees and profit
in his wise and hilarious 1940 book,
reallocation, i.e., the standard 1% and
“Where Are the Customers’ Yachts?”;
20% hedge-fund remuneration schedBurton G. Malkiel, author of the inule. At the start, Steinhardt observed,
fluential 1973 book, “A Random Walk
“Hi, I’m rich. What’s your name?”
there were perhaps 10 funds. Today,
Down Wall Street”; Jack Bogle, who
Read the footnotes
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