Value Investing

How I Learned to Stop Worrying and Love the “Vol”

Maybe it’s because Valentine’s Day is approaching, but we have love on our mind after last week’s stock market gyrations.  We love volatility.  Always have.  Volatility is an active manager’s best friend.  Sure, we all know Buffett’s advice that long term investors who are still in saving mode should welcome down markets.  And while that nugget is true, our love for volatility goes deeper than that.

Volatility is a tailwind for fundamental, active investors who rebalance their portfolios.  Done properly, simply rebalancing a portfolio should lead to outperformance versus the benchmark.

Assume a 2-stock benchmark (no dividends.)  Each stock starts and ends the year at $20.  Much like the risk premiums in the market, the return of our imaginary benchmark is 0%.  Now, let’s add a little volatility and a rebalancing effort in one period.

Stock Price     Shares Held     Position Size    
  Stock 1 Stock 2   Stock 1 Stock 2   Stock 1 Stock 2   Value % Chg
12/31/2017 $20.00 $20.00 100 100 $2,000 $2,000 $4,000  
6/30/2018 $18.00 $22.00 100 100 $1,800 $2,200 $4,000  
Rebalance       111 91   $2,000 $2,000   $4,000  
12/31/2018 $20.00 $20.00 111 91 $2,222 $1,818 $4,040 1.0%


We picked up 100 bp versus the benchmark!  What’s not to love?  Now let’s add a lot of volatility.

Stock Price     Shares Held     Position Size    
  Stock 1 Stock 2   Stock 1 Stock 2   Stock 1 Stock 2   Value % Chg
12/31/2017 $20.00 $20.00 100 100 $2,000 $2,000 $4,000  
6/30/2018 $16.00 $24.00 100 100 $1,600 $2,400 $4,000  
Rebalance       125 83   $2,000 $2,000   $4,000  
12/31/2018 $20.00 $20.00 125 83 $2,500 $1,667 $4,167 4.2%


Whoa.  4.2% just from rebalancing.  Powerful love potion.  Our takeaway?  We believe a likely, sustained increase in volatility should lead allocators to fall in love with active managers, but we’ll have to wait to see if Cupid agrees.

We realize this is mostly a simple reversion-to-the-mean argument.  Well, we love simplicity, too.  That explanation might have to wait until next Valentine’s Day.  For now, bring on the “Vol”!


This publication has been prepared by Azarias Capital Management, LP and is for informational purposes only.  Past performance is no guarantee of future results. The historical returns of the hypothetical investments mentioned in this commentary are not indicative of any future performance or the performance of any of our current or future investment strategies. The information provided is not intended as a complete analysis of every material fact regarding any market, industry, investment or strategy. Additionally, any views expressed by Azarias Capital Management, LP or its employees should not be construed as investment advice or a recommendation for any specific security or sector.

Value Investing is Dead

A famous hedge fund manager with a strong performance record spanning well over a decade questioned the efficacy of utilizing his “value” approach to investing. The companies with new, disruptive technologies sport valuations that are a mystery to him. Most importantly, the performance of those companies in the stock market crushed value stocks. This famous investor notes that it seems the market is irrationally valuing growth and momentum. In his opinion, the market is overvaluing market share gains driven by the disruptive nature of the new companies rather than the prospects for free cash flows of the new companies. Old valuation tools aren’t working. This respected manager is confident conditions will turn, but seems beaten down by waiting and confesses he has no idea when the turn might occur.

If our literary trick worked, you are assuming we are referring to the comments of Greenlight Capital’s David Einhorn in his recent partner letter.   We are not. The letter cited above reflects the thoughts of Julian Robertson as expressed in his final letter to partners dated March 30, 2000.   While conditions are quite different today than at the peak of the NASDAQ bubble in March of 2000, the similarities are noteworthy, including the anecdote above. Conditions could be ripe for a meaningful recovery in the relative performance of value styles.

At Azarias, we invest utilizing the same decision making process regardless of which styles are in favor.   In fact, the Azarias Focused Small Cap Value strategy has outperformed the Russell 2000 by 9.8% net of fees annualized since inception (November 1, 2015) despite our value-oriented style.  We attribute those strong results to our expertise in identifying turnaround opportunities near fundamental inflection points and our concentration of the portfolio in those 15 to 20 best ideas that meet our strict criteria for return potential and risk control.  Please review the attached overview of our strategy and contact us with any questions.

The return reported above is the Focused Small Cap Value Composite (net of fees) and includes cash, cash equivalents and the reinvestment of any income. The return of the index includes the investment of dividends but does not account for transaction costs and operating expenses, which an investor might incur in attempting to obtain such returns. If an index had expenses, its performance would be lower. You cannot invest directly in this index. The returns are as of the date(s) indicated and is subject to change. The performance data quoted represents past performance. Past performance is no guarantee of future result.

©Copyright 2017, Azarias Capital Management LP