George Noble, Finance, Fools & The Meaning of Multiples

Hedge Fund Manager George Noble Ranting/Explaining What Was Once Obvious

An Introduction to George Noble

For money managers in the Boston and New York area, George Noble is a well-known investor both for his stock-picking skills and unflinching willingness to tell it like it is. KCR holds a deep respect for George. He is a thought leader who believes, like we do, that financial history, fundamentals, and the price you pay matters to investor outcomes.

Part of the reason George believes these things is because they are simply true over the long haul.

George began his career at Fidelity Investments, working for Peter Lynch, where he would go on to run the Fidelity Overseas Fund (FOSFX). His performance there would make FOSFX the single best performing international equity mutual fund in the United States.

Seeing that a wildly overpriced market in Japan was ripe for disaster, George Noble’s Fidelity career ended as he went on to help found Teton Partners. George Noble’s hedge fund became a symbol of how the hedge fund business could protect and grow investor wealth in a manner with no correlation to the broad index.

By betting against speculatively priced firms of low-quality, George became a well known short seller. Short-sellers often come under fire during the go-go periods of markets like the one we are currently exiting. They are often portrayed as somehow “bad” simply because they bet against stocks.

KCR finds this unfortunate. Short sellers like George, Jim Chanos, David Einhorn, and many others have identified frauds long before the street caught on. While there are always bad actors in markets, having some short exposure does not a villain make. Why is calling out fraud, speculation, and promotional behavior somehow bad while….those committing fraud and encouraging retail speculation are somehow good?

We don’t get it. And neither does George. Like us, George believes that investors may benefit most from the asset classes that are the least popular if only because it implies that they are under-owned relative to other assets.

Many young, new, and other retail investors who have come of investing age in the post-2009 era have been subjected to some of the least scrupulous, most promotional and high-risk messaging KCR can recall in our lengthy careers. It took our firm a decade to decide we should go crazy and get a website—big step for this group. Social media, Twitter, and other venues are still very new to us, and we are anything but adept at navigating them.

George has taken the bull by the horns (literally!) and become a bit of a Twitter sensation. With his vast connections to some of the market’s most experienced investment research and newsletter authors, he began hosting “Twitter rooms” and a YouTube Channel. In those venues, he created a forum where newer investors could at least get exposure to the thoughtful wisdom and experience on hand from firms that are run by old-timers who have seen many market cycles.

KCR does not know how he did this or even how such things work, but George is bridging the knowledge gap between social-media impaired folks like us and younger investors. In our minds, this is a valuable service, and we encourage anyone interested in hearing from investing veterans to connect with George.

We cannot dissuade anyone from believing empirically impossible claims from celebrity CEOs and recently famous fund managers. But we can suggest that there is much to endorse listening to the other side of the story.

George Noble Georgetown University Presentation

George was recently asked to present at a seminar series sponsored by The Center for Financial Markets and Policy at Georgetown University. As their website states, “Georgetown University’s McDonough School of Business, the Psaros Center for Financial Markets and Policy has a legacy of impact – from its origins following the 2008 financial crisis….” We put that in there because it speaks to the idea that knowledge is only valuable if it is presented and debated.

We also find it notable that Georgetown’s Financial Markets policy highlights the post-GFC crisis. A period we fear has been forgotten. Our extensive series of White Papers, Quick Takes, and Charts for The Curious has been relentless in suggesting that to us, portions of today’s market look like a hideous mix of the dot.com bubble and the 2007 debt crisis.

George’s presentation was a masterclass in explaining why investors may be better served by caution and common sense than the promotional narratives that still swirl around a more expensive market than at the peak of the internet bubble. We strongly recommend watching his entire presentation, which can be found here.

At an hour and nine minutes long, we found the presentation to be remarkable. For the purposes of this post, we have created a highly condensed 14-minute version which you can view here:

In this heavily compressed version, we highlight the components of George’s presentation where he was kind enough to use some of KCR’s research. He begins by showing an excerpt of an old video of Peter Lynch that we featured in our piece Stock Speculation: How to Avoid Big Losses. George cuts Mr. Lynch’s presentation down to a critical few minutes and then contrasts it with the type of speculation on display today. The contrast, which can be seen in the first six minutes of our excerpted version of his presentation, is nothing short of hilarious.

As the presentation progresses, George hones in on some key material we put together in our piece Why Market Neutral Now. He takes the “meat” of our write-up and compresses the critical points into about six minutes (min 6 – min 12). (Thank you George!).

In June of 2020, KCR wrote a piece titled 60/40 Asset Allocation: Buying a Ticket on the Titanic. In that piece we explained that we felt bonds represented a whole lot of risk and negligible returns. If you watch from minute 8 in the video, George manages to explain in under two minutes why the confluence of easy money and low rates has merely “stolen returns from the future.”

Our team watched him speaking and found his message to be critical to any asset allocator. We recognize that old habits are hard to break. After all, allocating a chunk of money to stocks and another chunk to bonds has worked very well for a long time. Unfortunately, fixed income investing is called “fixed” for a reason. There is a simple arithmetic limit to what you can make, and George puts this painful fact into simple and quick high resolution.

He then goes on to explain why what you pay matters. Kindly starting with our work Growth Investing Gone Wrong, George builds it into a brilliant exposition on how paying extreme multiples for stocks – even if you are lucky enough to find the ones that go on to generate explosive sales and profit growth – is a mug’s game.

The overall conclusions we took away from watching George’s presentation are the following:

• Fundamentals matter, so make sure you know what you own
• Don’t pay indefensible multiples for companies as they swamp even superb execution
• The market environment over the last three years – “the everything bubble” – has made shorting feel almost impossible
• As the Fed struggles off the zero bound and with allocators having largely left the space, market neutral and other long/short strategies have largely been abandoned
• And for these reasons, hedged and market neutral strategies may be the most overlooked and important assets for a diversified portfolio in an environment where bonds and equities often rise and fall together

KCR’s sister company, L2 Asset Management, runs market neutral, long/short, and long-only portfolios with a value and quality bias. Our processes and strategies have been out of favor for the last few years. L2 employs a highly disciplined investment process characterized by high concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all our products are the beginning of what may be a long period where speculation is punished and prudence and patience rewarded.