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Monday, April 15, 2024

[From The Archives] Century Partners 1970 Barron’s Interview – Part Three

By Emily Stewart. Originally published at ValueWalk.

Century Partners was, in many respects, one of the world’s most successful early hedge funds.

The fund began its life during 1967, back in the day where running $20 million in private capital was a big deal. Between 1967, when the fund opened its doors for investment, and June 1970, every $1 invested in the fund had grown to $2.60 — a return of 160%. Over the same period, the Dow Jones Industrial Average lost around 20%.

During June 1970, Century Partners’ investment managers, James Harpel, and Richard Hokin sat down with Barron’s for an interview on their style and how they went about seeking a return in a hostile market.

[From the archives] Century Partners Barron’s interview — Part three

Century Partners didn’t just rely on stock and market valuations to trade. The fund tried to identify market trends. Prior to President Johnson’s speech of 1968, the market was depressed. Investors believed that the Vietnam War would drag on forever, inflation would eat away at corporate profits and tight lending criteria would constrict activity in the building sector.

President Johnson’s speech to the nation at the end of March 1968 changed this view overnight. His decision not to run for another term as President, as well as the revelation that he was planning to end bombing missions over North Vietnam and proposes peace talks gave a positive shock to the market.

“Barron’s: Did your basic investment thinking change in April of 1968?

Harpel: No. All that really changed was the market’s psychology…After listening to the speech, we felt people would think that things were going to change for the better. We remained bearish, but we felt the public’s enthusiasm would be great enough to warrant our getting back into the market.

Hokin: In August of 1968, we wrote a letter to our partners which contained the following line: ‘We are observing with fascination, and participating to some degree, in the creation of a giant market soufflé.’”

At this point, Century’s portfolio flipped from being around 10% net short, to 100% net long. Later in the interview, Hokin commented on why Johnson’s speech prompted such a dramatic change in strategy:

“In ‘68, we knew the economy was not in the best shape but because of the psychological impact of Johnson’s speech we knew the trend of the market for a while at least would be up. We also knew people would be desperately looking around for earnings growth, and the conglomerates were reporting higher earnings.

B: It sounds like you were buying the greater fool theory.

Hokin: In a sense we were…”

Century Partners 1970 Barron's Interview -- Part Three

Many of the pressures present in 1967 and early ‘68 were still present after Johnson’s speech (rising inflation pressured costs, bond prices started to look attractive and deteriorating levels of corporate liquidity were noted). However, Century jumped into the market to profit from rising prices. On area they targeted was the conglomerate sector.

“We knew that the earnings in many cases were a mirage. We also know that a conglomerate is essentially a very weak for of industrial organization because top management is far away from the operations it knows best. But we brought the group early and managed to make money doing it.”

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