Sometimes It Pays to Be Knowledgeable

I received this weekend through Seeking Alpha a second quarter 2020 letter from a long-short hedge fund. The letter contained a post-mortem on their successes, and to their credit, their most significant loss, which was a position in StarBulk. Reading through the tealeaves, they bought at the top and sold at the absolute bottom. They based their decision on the following factors: “We determined that there was no obvious catalyst to turn the market’s opinion of the company. We also thought, given its leverage to a growing economy heavily dependent on trade, the firm’s outlook may have changed in ways difficult to understand or foresee. Reshoring of supply lines, slowing globalization, increasing trade tensions, all seemed risks before COVID19, seemed more pressing now in the wake of the pandemic…in our postmortem of the trade, we struggle to see how we could have made any decision other than the one we made.”

I was buying SBLK at this point. I had done a lot of work on dry bulk names over the years. I knew when it came to Capesize shipping in the short term, none of the factors that that the hedge fund cited made much of a difference. Had they done their homework, they would have known that the Cape market depends on whether Brazil is shipping iron ore to China. Given the quality of Brazilian iron ore, it is more a question of supply rather than demand. I focused instead on an assessment of Vale’s iron ore shipments over the next six months. It is a case where the hedge fund’s being superficial provided knowledgeable investors with a gift.

On the other hand, I am not comfortable in tech, especially at today’s valuations. A dishwasher repairman came to my house. We were talking, and suddenly he mentioned his success on Robinhood. He bought and sold American Airlines, making a 95% profit. He was in and out of Disney and Darden at significant profits. He didn’t look at anything as prosaic as an income statement, balance sheet or valuation. My repairman was hitting out of the park. I didn’t tell him what I did for a living, and wished him luck. I told a friend about my conversation, and she commended me for not chastising him on the dangers of DIY investing. I replied, “Au contraire, I wanted to hear about his picks. If you want to predict how the S&P 500 is going to move short term, pay more attention to my dishwasher repairman!” Luckily for my investors and me, shipping is still a market where understanding fundamentals can be very profitable.