Iron Capital Insights

  • Iron Capital Insights
  • February 28, 2012
  • Chuck Osborne

Mixed Economic Data, Insider Trading, and The Loss of A Legend

Durable goods orders fell the most in three years and your house is still losing value, but don’t worry because consumers seem happy about the whole situation. These were the Strange Bedfellows that greeted us this morning with the release of durable goods orders, the Case-Shiller Home Price index and the consumer confidence index.

The markets, as of the moment I am writing this, seem to be keying on the last report, which is odd to me. The first two reports measure actual behavior, while the latter simply reports attitude. Don’t get me wrong, I am glad people are seeing the glass half-full, but does it really matter? I also wonder if it is accurate. The data for the consumer confidence report stops on February 15; since then, the average U.S. motorist has seen the price of gas rise 20 cents per gallon.

At Iron Capital we have always paid more attention to what consumers actually do rather than how happy they are while doing it, and I see no reason in this morning’s reports to question that wisdom. The cycle we have been talking about for the last few years continues. We had seen positive economic reports, especially on the employment front, and all of a sudden everyone thinks recovery is around the corner. Then Europe got serious again for a moment yesterday, and durable goods orders drop – don’t be surprised if there is talk of a new recession right around the corner. Neither reaction is correct. The truth remains that this is what sluggish growth looks like: Two steps forward and one step back.

Meanwhile the front page of The Wall Street Journal was covered with talk of insider trading. Since 2009 the U.S. Government has charged 66 hedge fund employees with insider trading, winning 57 convictions. They reportedly have 240 people under investigation and have deemed 120 of them “targets,” meaning they have found some evidence of wrong-doing and are trying to build their cases.

It is a little ironic that this headline comes shortly after the news that the investing community lost a legend on February 19: Walter Schloss, 95, lost his battle with leukemia. A few years ago I was asked by a client if I idolized Warren Buffett, because I quote him so often. I explained that I quote Buffett for two reasons: first, because he is extremely quotable; and second, because people actually know him. If I were to idolize any Benjamin Graham disciple, it would be Walter Schloss. My client responded by saying he had never heard of Mr. Schloss, to which I said, “Exactly.”

Schloss is most famous for having shared an office with a young Buffett when they were both working for and learning from Benjamin Graham. Buffett also used him as an example of a “Superinvestor” in his famous 1984 speech. Schloss was the embodiment of the anti-Wall Street money manager: He paid no attention to analyst reports, and didn’t wish to meet with management; he simply went to published financial reports and did the work himself, searching for great investment values. With zero insider information he managed to beat the market by more than 6 percent per year from 1955 to 2002 – a track record that rivals that of his more famous former co-worker.

Walter Schloss was proof that there is an alternative to back-room deals and insider games. He proved by example that investment success does not necessitate selling one’s soul. Deep in the Wall Street Journal article about the epidemic of insider trading there is an interesting tidbit: The FBI agents investigating these allegations were quick to note that the wrong-doers represented no more than 1 percent of the investment management industry. I think Walter would be glad to hear that.

Chuck Osborne, CFA
Managing Director