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Hi, I'm Steve Rosenberg. I'm 22 years old and from Ann Arbor, Michigan. It is a great honor for me to be here . First of all, I would like to thank you both for being heroes and positive examples for me and many others. Even more than for your success itself . I respect your unsurpassed decency. I have three short questions for you.
My last question— could you comment on the AW Jones model, the long-short investment model? I understand that for a capital the size of Berkshire, such a strategy does not make sense, but it seems to me that the play on the downside combined with a long looks extremely attractive, even taking into account the structural and mathematical shortcomings of shorting.
And I would like to know a little more about why you would lose money on your cart from a hundred scam companies . Yes, this is an interesting question, and we'll start at the end. Many people remember AW Jones, who once wrote for Fortune and developed the most famous hedge fund in the early 60s or so, maybe even in the late 50s.
And for some of the audience, I'll explain: AW Jones' original idea was to open long and short positions of approximately equal amounts and have a market-neutral fund so that the direction of the market would not matter. They didn't really stick to it over time. And I'm not even sure if AW Jones promised to do this, but sometimes they had 140% long positions and 80% short, so they had a 60% net long position or something like that.
They were not market- neutral throughout the period, but acted on the theory: open long positions on stocks that seemed undervalued and short on those that were overvalued. Even the Federal Reserve, in its report on the situation with Long-Term Capital Management a few years ago, called AW Jones a kind of father of this hedge fund theory.
As Mickey Newman knows, if he's still around, it seems that in 1924 Ben Graham founded the Benjamin Graham Fund, which was designed along these same lines and even used paired securities. In other words, he looked at General Motors and Chrysler and decided which one he thought was undervalued relative to the other, opening a long position in one and a short position in the other.
So the idea was that he got a percentage of the profits, and it was all a hedge fund, only it was founded in 1924. I don't know if Ben was the first to do this, but I do know that he was 30 years ahead of the fund that the Federal Reserve recognized as the first and that many still talk about as the first—the A.W.
Jones fund. Ben didn't think it was very successful. He even wrote about it, including the problems he encountered when applying this approach. As I recall, a fairly large percentage of pair investments worked well. He was right. The undervalued asset rose, while the overvalued one fell, or the spread between them narrowed.
But that one instance out of four, or however many there were, where he was wrong, brought much more loss than profit from the three where he was right. And, you know, all I can say is, I've been shorting myself in my life and had one particularly terrible experience in 1954 . And I... I can hardly remember a situation where I was wrong, looking at it from a distance of 10 years, but I can remember cases where I was definitely wrong considering 10 weeks, which turned out to be a crucial period , during which my capital melted away, and my liquid assets became less and less liquid, etc.
So, that's all I can tell you. It's very complicated, and the interesting thing is, of course, that AW Jones was a favorite ... in the late 1960s. Carol Loomis is here, she wrote an article called "The Jones Nobody Can Keep Up With," which is a very interesting article; but nobody wrote—nobody wrote articles about A.W.
Jones in 1979. That is, something went wrong, and others began to branch off from his company . Carl Jones broke away from his company. Dick Radcliffe broke away from his company. You can look at the whole list, and of the many, many, many who left, a very high percentage have gone bankrupt, including suicides, taxi driving, further employment— in short, everything.
And these people were...in the late '60s they wrote a book, there were a lot of photographs in it, I don't remember the title, but there were all these portraits of people who were extremely successful in the hedge fund business, but they never put out a second edition. So, this...this is just hard.
I I logically this should work well, but mathematically you can't open a short position for a large amount. You can buy until you're broke if you have the money. You can buy out the entire company if you have to, but you can't take a short position on the entire company. Uh, his name is Robert Wilson.
There are several interesting stories. He is a very, very smart guy. He once went on a trip to Asia with a short position. It seems to have been Resorts International, or perhaps Mary Carter Paint, as it was then called. And he lost a lot of money before he returned to the country. He is a very smart guy.
Made a lot of money on short positions, but one is enough to destroy you. And you need more and more money as stocks go up. You don't need more money when stocks fall if you paid for them in the first place and didn't buy on credit. You just sit back and find out if you were right or wrong. But you can't necessarily just sit back and wait to see if you were right in opening a short position.
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