New Warnings From an Investing Pioneer: Nowhere to run, nowhere to hide–and no one to get unbiased advice from

Jan 17, 2014

New Warnings From an Investing Pioneer

JASON ZWEIG

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Dean LeBaron, pictured at his home in Nokomis, Fla., says, ‘Look for the questions that are not being asked.’

Nowhere to run, nowhere to hide — and no one to get unbiased advice from. Judging by my inbox, that is how a lot of investors feel. U.S. and most international stocks, bonds and real estate are all at least moderately overpriced by historical standards; cash offers a negative return after inflation; and most market pundits have a vested interest in their advice.For some forthright suggestions on how investors should think about today’s markets, I turned to investing pioneer Dean LeBaron, one of the most original and open-minded financial thinkers I know of. His motto has long been: “Look for the questions that are not being asked.”

He suggests following the money–the Chinese money, that is–and investing in Africa, Canada and Mexico. He also likes assets that could benefit if the Federal Reserve’s low-interest-rate policy backfires, such as gold bullion, raw land and inflation-protected bonds.

What makes Mr. LeBaron worth listening to?

As he likes to say, “If the choice is between being first and being best, being first is better.” Mr. LeBaron founded Batterymarch Financial ManagementLM -0.77% in Boston in 1969, investing mainly in small-company stocks, an opportunity almost nobody else was yet interested in. Batterymarch also pioneered quantitative investing, which uses statistical analysis–not human judgment–to pick stocks. In the 1970s, he says, every employee at the firm had three computers: “We had 90 machines when many firms didn’t have one.”

In 1974, Batterymarch became one of the earliest firms to offer an index fund, the kind of autopilot portfolio later popularized by Vanguard Group. In 1978, long before most investors ventured overseas, Batterymarch began investing internationally; in 1987, the firm started investing in “Third World countries,” now called emerging markets.

Mr. LeBaron also invested in farmland decades before most asset managers did; he was among the first to put money into privatizations as Russia divested state-owned companies.

Mr. LeBaron sold Batterymarch to Legg Mason in 1995 for almost $60 million. He retired about a year later, but he certainly isn’t retiring. As unorthodox as ever, Mr. LeBaron, 80 years old, spoke to me this past week from his home near Sarasota, Fla.

For decades, the name of the game for investors has been to make as much money as possible. From now on, Mr. LeBaron thinks, the prime directive will be to “lose as little money as possible.”

He warns, “If we are in a transition period, then the person who is in the most danger is the one who has recently done well, because he’s done well on things that are about to change.”

In Mr. LeBaron’s view, the easy-money policies of central banks, including the Fed, have created what he calls “administrative markets”–in which prices are set at least partly by government policy rather than by market forces.

But, he worries, that can’t last forever. “In complex systems, the dynamics are predictable but the timing isn’t,” he says. “It’s like adding a grain of sand one at a time to a pile: You can’t tell when it will collapse, but you know it will.”

Mr. LeBaron, who invests only his own money nowadays, has no exposure to the U.S. stock market; the only bonds he owns are inflation-protected U.S. Treasurys.

The only stocks he owns are based in China, among them INESA Electron, a technology manufacturer, and Shanghai Chlor-Alkali Chemical. He holds the shares directly through certificates in safe-deposit boxes, rather than in electronic form; he thinks it is risky to have “custodial” banks hold electronic securities for safekeeping.

Mr. LeBaron believes the Chinese have more fiscal and monetary discipline than the U.S. So, he says, “I follow China around the world and invest where they invest.” Recently that has meant countries like Nigeria, Ghana and Kenya, as well as Canada and Mexico. Individual investors with the same idea might consider diversified, low-cost funds like the Market Vectors Africa Index exchange-traded fund, which charges 0.8% in annual expenses, or $80 per $10,000 invested, and the iShares MSCI Canada and iShares MSCI Mexico Capped ETFs, costing 0.53% apiece.

Can individual investors still succeed in the riskier world he foresees? Absolutely, Mr. LeBaron says. “Institutions tend to invest with a one- to three-year time horizon at most,” he says. “My suggestion for individuals is to change the horizon. Go longer.”

Or go gutsier. If you are tough, you might try emulating one of Mr. LeBaron’s most successful techniques at Batterymarch, where he ran a contest to see who could pick the stocks that would perform worst–not best–over the next year.

“It’s harder than it sounds,” he says–especially when you realize that Mr. LeBaron then went out and bought them all, more than 100 at a time. If you can hold on for several years, he says, “you should make enough on the ones that don’t go bankrupt to make up for the ones that do.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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