We readily concede that Greg Boland is really astute. But no one is infallible. Every manager has periods of adversity. In such a situation, would his brains be enough to keep giving you warm fuzzies? Some of you may know this as the Shania Test. Forget Sharpe ratios, the Shania Test is where it’s at.
At OPM Wire, we place our faith in the parameters of a strategy first and foremost. Then we look for consistent outperformance over a statistically meaningful period. Fifteen years is a reasonable starting point. And by the time we come to study the jockey, it’s almost superfluous. Good managers can have a great variety of backgrounds. We can’t analyze brains, but we can pass judgement on strategies and analyze track records. In our view, in the long run, no human, whatever their talents, can play a bad game well. Except maybe Jim Simons.
As I said last time, I do not have any performance history of West Face. The only number I have of them is a phone number with a non-prestigious 647 area code. Sad! Anyways, I can, to some extent, surmise what the return profile of a strategy might be based on the inputs that go into it. Everyone knows that Boland is a legend and has had many big wins, such as making five times his money on WIND Mobile in 18 months. But I always like to bring a variant perspective on stories, so let’s try to anticipate problem areas in his strategy. Some of the following reflects my personal biases, I realize it’s different courses for different horses:
-Firstly, he shorts. Shorting is difficult. Boland made a great call shorting Callidus. But he apparently lost money shorting Home Capital Group. All investing is, of course, hit and miss. Shorting, a little bit more. All for a maximum upside of 100%. I want a manager focused on long opportunities that can truly move the needle and shorts are a distraction to that important task. I used to be an active shorter. It was a giant waste of my time.
-Second, Boland makes very concentrated bets. At times, his top five investments have exceeded 50% of his main fund's value. We already know he likes troubled companies. Call me a hopeless simpleton, but wouldn't buying large stakes in troubled companies occasionally lead to problems? At the very least, a concentrated portfolio needlessly increases volatility.
-Thirdly, he does a lot of things. Private, public, distressed, turnarounds, equity, credit, high yield, activism.
-Fourthly and perhaps most importantly, he loves to follow trouble. In his own words:
Being a contrarian and buying at the nadir of investor confidence has always appealed to me psychologically, I don’t know why. The result is you often get some bumpy rides at the beginning. If you’re trying to catch a falling knife, you can get a few nicks on the way down.
I have to admit I am not very familiar with his main specialty, distressed investing, maybe it escapes general laws of investing I have come to believe. But I know that Newton Glassman, at one point the king of distressed investing in Canada, after compounding at out-of-this-world numbers for a while, has had some serious setbacks.
There's a split in the Church of Buffett between those who believe in old-school, Benjamin Graham-style value focused on cheapness vs the Charlie Munger school focused more on quality companies. OPM Wire sides with the latter. And if you look at what he does, Buffett is squarely in the quality camp. The goal of an investor is to find princes. Occasionally, a frog becomes a prince, but that doesn't mean your job becomes finding frogs to kiss.
I believe the elements I have enumerated above will (or may already have) lead to idiosyncratic episodes of underperformance. Uncorrelated performance, but not in a good way. Boland is pretty comfortable investing in the oil and gas sector, I would be especially curious to find how he has navigated that space in recent times. It has proven a trap for many value investors I follow.
If one of my fund managers is down a lot, the only good excuse for me is "we're in a bear market". But shorting, concentrated portfolios, catching falling knives, etc. introduce hard to assess risks. I will be wondering has my manager changed, if he or she is still of sound judgement. In Shania's words, I will not feel warm in the middle of the night.