Monday, August 20, 2012

Speculative Contagion

For years, value investor Frank Martin's returns suffered relative to the market as the tech bubble grew to epic proportions. Value stocks were getting clobbered. In 1998, the S&P 500 returned almost 30%; in the same year, Martin Capital Management returned minus 7.4%! His book, Speculative Contagion, reproduces his correspondence with clients during this difficult period.

The book is full of discussions of value principles. As the tech bubble rages on, Martin is fascinated by the mania around him, but recognizes that valuations are absurd.

As time goes on, events turn favourable for Martin. The bubble bursts, and many of the beaten down value stocks Martin owns start to outperform the market by extremely wide margins. The book puts the reader in the shoes of a value manager who had to face years of a market that was far removed from reasonable valuations, but who eventually triumphed.

If I have one criticism of the book it's that Martin does not discuss companies with much degree of specificity. While he consistently touts finding companies with competitive advantages that are trading at discounts to intrinsic value, he does not discuss any such companies or their inherent advantages. Much of the discussion, therefore, is on a macro level.

Enjoy!

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