What's Good Enough for Asia is Good Enough For Me
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Last month's meltdown in internet stocks has kept me up at night. No, it's not because I lost a lot of money. I like net stocks but still believe in a balanced portfolio. Actually I've been troubled because the sell off has been missing the big "why." Well, last week brought the answer, and I'm sleeping a lot better now.
Throughout the downturn I kept looking for the usual horror stories - you know, the overextended on margin kind of thing, but the worst anyone could come up with was a universe of investors with about 2 1/2 percent of their assets on margin. We didn't hear about any one diving out of windows or, thank God, any desperate day traders off on shooting sprees. Mutual fund mangers didn't report withdrawals, and, in fact, had net inflows. So who, I wondered, was selling, and who was hurt.
Last week we found out. It turns out that it was none other than the legendary financier and hedge fund operator George Soros and his chief lieutenant, a/k/a portfolio manager, Stan Druckenmiller. No postal shoot outs here, but when the cannon finally went off it was Druckenmiller who ended out on the street -- poorer, no doubt, but, by most standards still well off.
Like hedge fund manager Julian Robertson before him, Druckenmiller has had a hard time adjusting to the new, low inflation, high growth economy. Druckenmiller's stock performance record was built in the early 1990's, when the economy still had cycles and inflation was still a factor in the investment equation. In other words, the days when you could make money the old fashioned way -- by making huge cyclical economic bets.
So if you buy something you don't understand, you probably won't be the first to catch on when people start to sell, which they did earlier this year. Why? Well, for starters, P/E multiples had risen by about 50%,which is often a sell signal. Too, those investors who had gains -- and there were lots of them -- needed to raise tax money. Finally, the first quarter is a lousy time historically for tech stocks, anyway.
So, fully leveraged, Druckenmiller was caught in a downswing. His boss, George Soros, who admits the kind of bets he used to make don't work any more, probably hastened the decline by pulling the plug. According to what I've read, the (formerly) $8 billion Quantum fund admits to being down about 30% this year and is ready to return cash to all its investors (unlike Julian Robertson, who distributed the assets to other managers). In other words, Quantum, except for Soros' stake, is liquid. It has sold its holdings. I'll bet other hedge funds are in the same position, since they often follow each other.
So now that you know (1) why these stocks went to dizzying heights, and (2) why they fell to earth you'll probably sleep better, like me. And with that out of the way, you can start focusing on the value part of a group that has undergone a serious correction. And don't loose any sleep over Soros and Druckenmiller, either. Even at half its former value, the Quantum fund is formidable, and I'm always impressed by someone who knows when it's time to fold his hand and move on. Remember that the next time the multiples expand by 50%.