Thursday, June 9, 2011

Martin, A Decade of Delusions

Frank K. Martin, who founded Martin Capital Management in 1987, wrote long annual letters to his clients. In 2006 he published Speculative Contagion, a compilation of his annual communiqu├ęs from 1998 to 2004. His new book, A Decade of Delusions: From Speculative Contagion to the Great Recession (Wiley, 2011) incorporates his earlier work and takes the story up through 2009, with an epilogue entitled “This Time Is Different.”

Martin’s fund, headquartered in Indiana, has a value orientation. “[T]he long-term challenge for us as a small shop doing battle with the New York Yankees of the investment world is to use our minds (we don’t have the financial muscle) to do what Billy Beane does so extraordinarily: to find value where no one else can find value.” (p. 249) The fund, similar to most value funds, lagged during strong bull runs and excelled during sharp pullbacks. So it’s not surprising that Martin fretted as stocks got marked up way beyond what turned out to be their true worth.

A Decade of Delusions is a cautionary tale, exposing excesses and arguing for the road less traveled. Value investors should relish it. Those who respect history can learn from it. But it’s also a veritable Bartlett’s Quotations for the markets. I particularly like the oft-quoted Leibniz quotation (one that a good translator should revisit), but that bears repeating: “Nature has established patterns originated in the return of events, but only for the most part.” As Martin notes, “Leibniz’s conditional phrase ‘but only for the most part’ gave permanence to the presence of risk.” (p. 314)

Although Martin doesn’t quite rise to the level of the homespun humor of his idol Warren Buffett, about whom he writes extensively, he can occasionally be scathingly funny. Sometimes he is just scathing. Consider, for instance, two subheads: “The Malevolent Mathematical Mystery of Modern Money Management (a.k.a. MPT)” and “The Absurdity of the Collective Wisdom of Individual Irrationality.”

A footnote for fans of Jack Bogle: he wrote the foreword to this book.

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