I remember how happy I was when William Jahnke made the first spirited attack on Brinson, Hood and Beebower's 1986 paper, Determinants of Portfolio Performance, and its claim that 93.6% of returns could be attributed to asset allocation.
Jahnke's 1993 riposte, "The Asset Allocation Hoax" went to the heart of the matter, that BHB's model was static rather than dynamic. When Ibbotson and Kaplan came out with "Does Asset Allocation Policy Explain 40%, 90%, or 100% of Performance?" in 2000 I put the matter to rest, at least in my own mind.
Now I'm having second thoughts that I know all I need to know about asset allocation.
It started last month when we posted "Updated--Leon Cooperman: "A Case Study in Financial Brilliance: Dr. Henry E. Singleton of Teledyne Inc.". Looking at Singleton's record you get the feeling that he knew more about the tactics and strategy of using assets than just about any academician or practitioner.
Here's a version of the Singleton story that is more accessible than Mr. Cooperman's NYSSA presentation.
The Brain Behind Teledyne, A Great American Capitalist
Something went haywire with American capitalism in the 1990′s, and we think we know what it was: There weren’t enough Henry E. Singletons to go around. In truth, there was only one Henry Singleton, and he died in 1999. He could read a book a day and play chess blindfolded. He made pioneering contributions to the development of inertial navigation systems. He habitually bought low and sold high. The study of such a protean thinker and doer is always worthwhile. Especially is it valuable today, a time when the phrase “great capitalist” has almost become an oxymoron.
Singleton, longtime chief executive of Teledyne Inc., was one of the greatest of modern American capitalists. Warren Buffett, quoted in John Train’s The Money Masters , virtually crowned him king. “Buffett,” Train reported, “considers that Henry Singleton of Teledyne has the best operating and capital deployment record in American business.”
A recent conversation with Leon Cooperman, the former Goldman Sachs partner turned portfolio manager, was the genesis of this essay. It happened in this fashion: Mr. Cooperman was flaying a certain corporate management for having repurchased its shares at a high price, only to reissue new shares at a low price. He said that this was exactly the kind of thing that Singleton never did, and he lamented how little is known today of Singleton’s achievements as a capital deployer, value appraiser and P/E-multiple arbitrageur. Then he reached in his file and produced a reprint of a critical Business Week cover story on Teledyne. Among the alleged missteps for which Singleton was attacked was his heavy purchase of common stocks. The cover date was May 31, 1982, 10 weeks before the blastoff of the intergalactic bull market.
The wonder of Singleton’s life and works is the subject under consideration-admittedly a biographical subject, as opposed to a market-moving one. We chose it because Singleton’s genius encompassed the ability to make lemonade out of lemons, a skill especially valuable now that lemons are so thick underfoot.
Singleton was born in 1916 on a small farm in Haslet, Tex. He began his college education at the U.S. Naval Academy but finished it at M.I.T., earning three degrees in electrical engineering: bachelor’s and master’s degrees in 1940, and a doctorate in 1950. In 1939, he won the William Lowell Putnam Intercollegiate Mathematics Competition Award. In World War II, he served in the Office of Strategic Services. At Litton Industries, in the early 1950′s, he began his fast climb up the corporate ladder: By 1957, he was a divisional director of engineering. In 1960, with George Kozmetsky, he founded Teledyne.
Anyone who was not reading The Wall Street Journal in the 1960′s and 1970′s missed the most instructive phase of Singleton’s career. When the Teledyne share price was flying, as it was in the 1960′s, the master used it as a currency with which to make acquisitions. He made about 130. Many managements have performed this trick; Singleton, however, had another: When the cycle turned and Teledyne shares were sinking, he repurchased them. Between 1972 and 1984, he tendered eight times, reducing the share count (from high to low) by some 90 percent. Many managements have subsequently performed the share-repurchase trick, too, but few have matched the Singleton record, either in terms of market timing or fair play. Singleton repurchased stock when the price was down, not when it was up (in the 1990′s, such icons as G.E., I.B.M., AOL Time Warner, Cendant and, of course, Tyco paid up-and up). He took no options awards, according to Mr. Cooperman, and he sold not one of his own shares. Most pertinently to the current discussion of “corporate governance,” he didn’t sell when the company was buying (another popular form of managerial self-enrichment in the 1990′s).
The press called him “enigmatic” because he pursued policies that, until the mists of the market lifted, appeared inexplicable. For example, at the end of the titanic 1968-74 bear market, he identified bonds as the “high-risk asset” and stocks as the low-risk asset. Accordingly, he directed the Teledyne insurance companies to avoid the former and accumulate the latter. To most people, stocks were riskier, the proof of which was the havoc they had wreaked on their unlucky holders during the long liquidation.
Some were vexed that, for years on end, Teledyne paid no dividend. The master reasoned that the marginal dollar of corporate cash was more productive on the company’s books than in the shareholders’ pockets, and he was surely correct in that judgment. Teledyne’s stable of companies (many in defense-related lines, others in specialty metals, offshore drilling, insurance and finance, electronics and consumer products, including Water-Pik) generated consistently high margins and high returns on equity and on assets.
Singleton made his mistakes, and Teledyne’s portfolio companies made theirs. A catalog of some of these errors, as well as not a few triumphs misclassified as errors, appeared in the Business Week story. We linger over this 21-year-old piece of journalism because it illustrates an eternal truth of markets, especially of markets stretched to extreme valuations. The truth is that, at such cyclical junctures, doing the wrong thing looks like the right thing, and vice versa. In the spring of 1982, few business strategies appeared more wrongheaded to the majority of onlookers than buying the ears off the stock market.
On the BW cover, the handsome Singleton was portrayed as Icarus in a business suit, flying on frail wings of share certificates and dollar bills. The article conceded that the master had done a pretty fair job for the shareholders, and it acknowledged that the share repurchases had worked out satisfactorily-to date. They had, in fact, boosted per-share earnings, “and also enabled Singleton, who held on to his own Teledyne shares, to amass 7.8 percent of the company’s stock.” He was the company’s largest shareholder and its founding and indispensable brain.
Yet the magazine was not quite satisfied, for it perceived that Singleton had lost his way. For starters, it accused him of having no business plan. And he seemed not to have one. He believed, as he later explained at a Teledyne annual meeting, in engaging an uncertain world with a flexible mind: “I know a lot of people have very strong and definite plans that they’ve worked out on all kinds of things, but we’re subject to a tremendous number of outside influences and the vast majority of them cannot be predicted. So my idea is to stay flexible.” To the BW reporter, he explained himself more simply: “My only plan is to keep coming to work every day” and “I like to steer the boat each day rather than plan ahead way into the future.”
This improvisational grand design the magazine saw as the “milking” of tried-and-true operating businesses and the diverting of funds to allow the chairman to “play” the stock market. A BW reader could imagine Singleton as a kind of Nero watching Rome burn while talking on the phone with his broker....MUCH MORE