Comstock Partners Long-Standing Bearish Bets Paid Off Big Last Year
That last year was murder on portfolio managers (and their clients) is not news. But that a mutual fund, albeit one long run more like a hedge fund and only $70 million in size, managed to navigate its way through 2008 and end UP just shy of 55% is news.
News that theWall Street Journal’s quarterly mutual fund extravaganza last Monday for some curious reason chose to bury in its acres of tables — while crowning a fund that ended ’08 barely flat the year’s sole “winner.”
Well, I beg to differ, and so do Charles Minter and Martin Weiner, who together run Gamco’s Comstock Capital Value Fund and whose stellar 2008 performance was all-but-ignored by the business paper of record. Long-time bears known for their close attention to the fundamentals of macro-economics and valuation, as well as for their pungent and perspicacious website commentaries, the pair scored big with aggressive short positions in puts, stocks and futures last year. The New Year dawns with Charlie and Marty expecting more of the same, but in a considerably less one-way market environment — and still waiting for multiples low enough to be transformative — and to turn them into bulls. KMW
I have to ask, guys. Have you complained to the Wall Street Journal about essentially leaving you out of their coverage of the bestperforming mutual funds for the fourth quarter and all of 2008?
Charlie: It was disconcerting to see their “One Fund in 1,700 MadeMoney in ‘08” story identifying that lone profitable fund as one up all of 0.4% for the year, when we were up better than 50%. As best as I have been able to ascertain, since they did include Comstock Capital Value in their lists of biggest winners in the quarter and year, is that either their reporters don’t see those rankings or the editors can’t figure out how to pigeon-hole us except as a “bear fund” — and didn’t want to write about anything so unseemly.
Funny, I see that as the story. You guys were — very publicly — bearish on housing and the financial sectors long before almost anyone had heard of subprime slime — much less of Ponzi schemes for the country club and private jet sets. And you finally profited dramatically from your foresight last year. Yet the kudos are going elsewhere. You’re clearly not sufficiently focused on P.R.
Marty: We have better uses for our time.
Charlie: Isn’t it amazing that guy Madoff got away with it for so long? I find it just unbelievable, incredible. But that’s only a sideshow. Here at Comstock, we’re certainly pleased that our average annual return came in at a positive 54.25% for the difficult year that was 2008, and that it’s now 13% (annualized) over the past three years. I do want to stress, though, that we don’t consider ourselves “a bear fund” because at any time we could change strategies and become bullish or even very bullish. But right now we are still very bearish and I guess everyone will continue to view us that way until we adopt a bullish stance.
Marty: We concede that we have been bearish for a long time—but if you look at it the way we have, the financial mania of the late 1990s was insane. Then the bear market of 2000 - 2002 was never allowed to finish its business because the Fed pumped up another bubble in housing and stopped the recession before a normal cleansing could take place. We just couldn’t turn bullish as debt was exploding throughout the cyclical bull market of 2003-’07. We always felt that the enormous Debt/GDP ratio would eventually bring the financial system down.
Then it was a case of your long-standing bearish bets finally paying off big last year, was it not?
Charlie: That is correct. We were 100% or more net short through most of the year. And though we eased back from that aggressive position in early December, we don’t think the bear market is over yet.
So you did get out of the way of the rally off of the November bottom?
Charlie: That’s right, pretty much because Marty and I had a gut feeling about valuations, a topic we’ve written extensively on, over the years. Being bearish for so long has been very difficult for us, as you know, and we were determined to preserve our very good performance through yearend.
Your bearish stance did cost you dearly during the internet bubble and again when you refused to jump back into stocks in 2002- ’03.
Charlie: It didn’t seem like many of the things that we were saying were incorrect in the late ‘90s, when we got bearish. But we were clearly early and then just lost so many assets as the internet bubble got bigger and bigger for the next two years. Then we had three good years — well, 2000 was okay, at a plus 9% annual total return, but 2001 and 2002 were great at over 21% and over 35%, respectively. Then our luck turned again. We stayed strategically bearish through 2003, 2004, 2005 and 2006. We just didn’t believe that one of the shortest and shallowest recessions in history — or that stock market valuations that, on the broad indexes, only came down to levels that were still higher than they’d been at every earlier stock market peak in history — were enough to correct for what had been the biggest stock market mania of all time. So we suffered through an even longer stretch of being out of sync with the market. Those were just horrendous years for bears like us who thought that they understood what was going on. We had to question our sanity many times.
Small wonder, considering that your fund reported negative annual total returns of 30%, 13%, 11% and nearly 8% over that span. Granted, the charts now say that those years saw the mother of all secular bear market rallies, but I imagine you rather wish it hadn’t wrong-footed you so.
Charlie: Sure. Losing money isn’t the idea — and it’s never fun. But we had to do what we believed was right, and we never thought that we were seeing anything more than a very strong counter-trend rally in the secular bear market that had to follow the truly unbelievable financial mania of the late ’90s.
The markets did get pretty grim in 2001 and 2002, as I recall.
Marty: They did. By the fall of 2002, the S&P had declined from about 1525 to just under 800, or about 50%, while the NASDAQ had plunged roughly 80%, from about 5000 to 1100. The Dow Jones Industrials had fallen from 11,900 to about 7200 or about 40%. Under normal circumstances, that would have been enough damage to believe that the bear market had corrected the excesses of the late 1990s and that we should be off and running with a new bull market.
But? What wasn’t normal?
Marty: There were three things wrong with that picture. First, the market trough of 775 for the S&P 500 was still at 26 times earnings (or higher than at every market peak in stock market history until the bubble of the late 1990s).
We would have expected the market to trade closer to 10 times earnings or less, since that is where most market troughs traded, historically. Since then, the P/E on the S&P has declined to around 21 times estimates of 2009’s reported earnings, which is still typical at market peaks, not troughs.
Wait a minute. Turn on bubblevision and you’ll hear all sorts of claims that stocks are cheaper today than in years, with the P/E on the S&P closer to 11.
Charlie: That’s based on estimates of operating earnings. Don’t get me started on the folly of using analysts’ earnings estimates as the basis for anything. We have actually been tracking their incredible shrinking act for the last year.
[See table, page 4.] It would be bad enough if the estimates were merely bullishly biased lagging indicators, but the way estimates are abused on Wall Street just makes us crazy.
We’ve been railing about it for years, to whomever will listen. It simply astounds us that almost nobody but us seems to object to the fashion that took hold on Wall Street about a decade ago of basing valuations on operating earnings — which are profits before writeoffs — instead of using reported GAAP earnings, which after all are the product of “generally accepted accounting practices.”
Marty: Sad, but true. Let’s get off that tangent though, before we lose sight of our main point — why we never believed the market bottomed in 2002. Our second reason was that the debt build up during the late 1990s was never liquidated as you would have expected in a recession. Instead, as Charlie mentioned, we experienced one of the mildest recessions in history with minimal impact on the public and no debt liquidation at all.
Third, the bear market of early 2000 to October 2002 never produced the public capitulation that we expected and talked about on our website [www.comstockfunds.com] all through 2002. The liquidation of equity mutual funds in that bear cycle amounted to less than 1% of total equity mutual fund assets — and that was after the largest inflow of money into those same equity mutual funds in the first two quarters of 2000, which coincided with the peak in the market.
Charlie: We were expecting something more typical, like the 8% and 14% liquidations in the market breaks of 1987 and 1973-’74, respectively. It was hard to believe the stock market was on its way to starting a new bull trend after just that relatively minor public capitulation following the greatest financial mania of all time.
(Still, in retrospect it’s quite clear that the markets were in no mood to wait around back then for your conditions to be met. What did your analysis miss in 2002?
Charlie: The Fed.
Marty: And the massive real estate bubble everybody now realizes, too late, that Greenspan’s incredible series of 14 rate cuts, from 6% to 1%, created. Those cuts – and Greenspan’s decision to hold rates at 1% far
