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  • Chris Mayer

“Bucky,” a 235-bagger and volatility

Updated: Jan 12, 2019

Buckminster Fuller, the essays of Murray Stahl and financial curiosities of various sorts are the subjects of today’s post.

And yes – to answer a question that comes up – in future posts I’ll be updating my favorite stocks. I want to wait until we get Q4 and year-end numbers before I start writing about them. But there are some tantalizing bargains out there now. And I’ve been buying. So I may preview one or two before then. More soon.

For now, let’s start with Buckminster Fuller…

*** The Genius of “Bucky” Fuller

“I have deliberately tried to present things to you, coming from the whole to the particular… I am very eager that you feel the absolute interconnectedness of everything.” – Buckminster Fuller

The actor Jeff Bridges (“the Dude”) gave a speech at the Golden Globes that had people talking. I didn’t see it, but I looked it up after I heard he mentioned Buckminster Fuller (1895-1983).

“Bucky” – as Fuller preferred people call him – is one of my favorite thinkers. I have (nearly) all his books, plus a handful of others about him.

He is perhaps most famous for his geodesic domes, though he had many other designs. He was the holder of 28 US patents. He wrote 28 books and gave countless hours of lectures. (Many of these talks are now on YouTube).

Bucky worked himself into many different fields – architecture, geometry, design science, and more. He was part teacher, part engineer, part inventor, part poet, and a bunch of other things too. No single label suffices.

He was also a pioneer in systems theory. Everything is connected to everything else. As Bucky often said: Nature doesn’t have separate departments for math, chemistry, biology, physics, etc. It’s all one process. His was a comprehensive approach to life.

Bucky’s books are not easy reading. But once you “get it,” his ideas soak into you like a dye. Your way of seeing and thinking changes permanently. (If interested, perhaps the best place to start is a book about him. Hugh Kenner’s Bucky is a good read. Or Larry Seiden’s biography, Buckminster Fuller’s Universe.) Perhaps I’ll write more about how I apply Bucky’s insights another time.

Anyway, some of the investors I admire most are those who take this “comprehensivist” view. They bring insights from various disciplines to their work. Charlie Munger is perhaps the best example. (See his famous speech titled “A Lesson on Elementary, Worldly Wisdom as It Related to Investment Management and Business.”)

Murray Stahl is another.

*** Investing Commentaries and Conundrums

Murray Stahl is the co-founder of Horizon Kinetics. I first learned about Stahl from Grant’s. The December 2000 issue carried the lead story, “The Stahl Report.” It kicked off this way:

“Murray Stahl, the author of probably the finest collection of self-published investment essays of the bull market era, holds a bachelor’s degree in computer science from Brooklyn College and an MBA from Pace. However, a key to his investment thinking is a third academic credential he earned, also from Brooklyn College: a master’s degree in history.”

The collection mentioned had the grand title of “Collected Commentaries and Conundrums Regarding Value Investing: The Essays of Murray Stahl.” It included essays bearing such titles as:

* “Minutes of the British War Cabinet, September 18, 1940: A Non-Mathematical View of the Logical Consequences of Portfolio Turnover”

* “The Pony Express and the Internet: or The Fallacy of Predicting Technological Obsolescence”

* “The Island of Krakatau and the Worst Investor in History”

Stahl is also author of a 2011 book How They Did It: Exceptional Stories of Great Investors. This book collects essays on such figures as Warren Buffett and John Maynard Keynes and the Rothschilds. But also includes lesser-known figures such as Charles Alfred Pillsbury, Charles Guth, Lih Goh Tong and many more.

Back in 2000, after I read Grant’s piece, I contacted Stahl’s firm. I managed to get a copy of his “Collected Commentaries.” I love them. Here was an investor going well beyond the normal bounds of security analysis. He applied insights from history, psychology, philosophy, mathematics and other disciplines. Here was an investor for which no fact or idea hung in isolation, but for which context was everything and contingencies abound.

In all these essays, Stahl showed a flair for the comprehensivist thinking Bucky extolled. Ever since reading them, I have followed Stahl through his conference calls and writings. In 2016, I finally got to meet him in person and spent over two hours with him in his office. He was gracious and humble and seemed the kind of guy you’d love to meet for coffee every week if you could.

In recent years, Stahl began collecting his essays again. In 2015, 2016 and 2017, his firm issued the bound “Compendium Compilation: Selected Essays Published in 2017 [or 2016 or 2015 as the case may be].”

Many of these essays involve Stahl taking things apart, like an engineer disassembling a toaster to see how it all works. Stahl is never one to take the label someone else slaps on something at face value. In the course of these explorations, Stahl unearths all kinds of curiosities.

The curious case of the South African ETF and a premise that is almost never true

For example, he loves to look under the hood of exchange-traded funds (ETF). In one essay, dated February 2017, he looks at the iShares MSCI South African ETF (EZA).

Investors think country ETFs are an easy way to invest in a country. This premise is widely accepted among investors and advisors. The problem is the premise is almost never true.

Stahl found that Naspers was the largest position at nearly 24% of the South African ETF.

Originally, Naspers was a newspaper company that published in Afrikaans. It later became a pay TV station. It eventually bought shares of Tencent, a Chinese company that ran an instant messaging service. The investment cost $34 million at the time. When Stahl wrote his essay, that investment turned into a pre-tax value of $80 billion.

That’s right, from $34 million to $80 billion. (That’s a 235-bagger, if you’re keeping score at home). As a result, Naspers' stock returned 550% over the decade to December 2016.

Needless to say, Naspers' large return, in turn, drove the South Africa ETF. Here is Stahl:

“An investor in iShares South Africa, as a basis for their investment, might have considered the condition of the mining industry or gold prices before investing. Some might have considered the deteriorating political situation. Some potential investors may have given weight to the 16.68x P/E. However, what is the meaning of the P/E when almost one-quarter of the index – the Naspers position… 23.85% of the South African index is really an investment in a high-P/E Chinese internet firm.”

Stahl goes on to show that other firms in the index are not really a play on South Africa either. For example, Vodacom is a phone company with more than 50% of its customers in other parts of Africa. AngloGold Ashanti is another holding, a gold miner with most of its operations outside of South Africa. MTN Group is yet another, a cellular firm with 232 million customers (whereas the entire population of South Africa is 55 million) and 35% of its revenue coming from Nigeria.

How much of the South Africa ETF is actually in South Africa? It would seem not much.

Volatility… and a better measure of risk

Another area where Stahl’s digging leads to interesting insights regards the widespread use of volatility, or standard deviation, as a measure of investment risk. Stahl writes that modern portfolio could no more exist without standard deviation anymore than physics could exist without gravity. The problem for finance is that standard deviation is nowhere near as predictive as gravity.

In recent years, the low volatility of markets had become a dominant narrative. (Quashed of late, it seems.) At the time of Stahl’s writing, the three-year standard deviation on the S&P500 was 10.4%. And indeed Stahl’s digging shows this number is almost without precedent.

But the key is “almost.” Stahl shows that if you look at standard deviation on an annual basis, there are sixteen years out of nine decades where the standard deviation was below the 10.4%. Further, he shows such measures seem to have no predictive power:

“For example, in 1944, the standard deviation was calculated to be 9.3%. In the ensuing five years, the large capitalization stock return was 10.69% annualized, as calculated by the [Stocks, Bonds, Bill and Inflation] Yearbook. On the other hand, the 1972 standard deviation was calculated at 7.28%. In the ensuing five years, the largest capitalization equity rate of return was negative 19 basis points.”

These and similar anecdotes suggest that standard deviation is not a very good measure of risk. Whether a stock, or group of stocks, has been volatile in the past is no indication that it will remain so in the future. And such volatility seems not to predict what kind of return you can expect.

Even without any data, what Stahl is saying makes logical sense for anyone who follows companies. Companies change over time. They can change business lines. Management changes. Competition changes. And on and on it goes. Why should volatility somehow stick?

Further, the things people assume about volatility don’t seem to hold all the time. For example, people tend to think small cap stocks are riskier than large cap stocks because of higher volatility. But Stahl notes that the volatility of large caps exceeded that of small caps in eleven years out of the ninety years under consideration.

What to take away from this discussion on volatility? Volatility not a good measure of risk. If investors are more concerned with a bad investment outcome as opposed to mere price declines, then Stahl suggests we look at leverage. Debt “is a much better indicator of risk than standard deviation.” He predicts that leverage will eventually displace price-based considerations such as standard deviation. (We can only hope!)

There are many other essays where Stahl shows how important it is to think in terms of context and to consider how things fit together. All of this is thoughtfully well done.

Bucky would’ve approved.


Published: January 10, 2019

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