Randall Abramson went to the “school of osmosis”—a term he uses to refer to the childhood home where his stock-market-obsessed father, a copy of financial magazine Barron’s, and investment TV show Wall Street Week were fixtures, subtly preening him for a career in asset management. By the time Abramson was in his teens, he was picking stocks, and fellow summer camp counsellors were chanting, “Buy low, sell high.”
Now, Abramson is CEO and portfolio manager for Trapeze Asset Management Inc., working alongside his father. Their years of experience and the pain of the recession led them to create a rigorously researched four-pillar investment approach. Below, Abramson details the model behind each pillar in his own words.
“The four pillars are two macro pillars and two micro pillars. There are two top-down macro pillars: the first is TEC, our economic composite. It emphasizes one key indicator, cribbed off of the Fed model, which analyzes the inversion of the yield curve. It notes when interest rates in the short term are very high versus when you go up the curve and they’re lower. When that happens, short rates are high, and long rates are low; it’s typically because they’re taking money out of the system and trying to slow down the growth to either deflate the economy and lower inflation or to ensure that it stops overheating. In normal course, the curve is either flat or positively sloped. That’s positive for a buoyant economy. But recessions typically don’t start until you get the inversion. We took that and we combined the inversion with economic statistics like unemployment and consumer confidence, and when we get a low score of 1 in 10, a recession has typically followed.
We didn’t have that prior to 2008–09. We built that so [that] we would hopefully never miss one again. When we tested it back to the ’60s, it caught every downturn with a lead time of about 280 days.
OUTSIDE THE OFFICE
“It’s a combination of family and sports. Whether it’s swimming at the lake, skiing, or riding a bike—that’s my outlet. I’m Canadian, so I play hockey three times a week. But I also grew up playing baseball. My youngest daughter now plays in Little League.
If I could picture myself, I’m picturing myself as 6’2” instead of 5’8”. Then I’d be playing centerfield somewhere instead of managing portfolios—but I wasn’t endowed with that physique.”
You can have a tame recession, or you can have a horrible recession, so we also built a relative indicator of momentum: TRIM, our second macro model. It’s a sophisticated moving average, and when the market drops below this TRIM line, we get a sell signal and can get out of the way of a debacle. Retroactively, the model caught every 20 percent correction back to the ’40s on the S&P 500—except the ’87 crash.
On the micro side is our valuation model, TVM. Every quarter, we’re looking back to see what the revenues of a company were in the last year, taking an average margin of the last three, then applying that and using a discount rate that we’ve developed to gross up the value of those earnings—all in order to determine the fair value of a company. We’re looking for companies that are either overvalued to short or undervalued to buy. We use this tool as a filter to sort the universe. Then the analysts do the heavy lifting to ensure the ideas pass muster.
TRAC is our last piece of the puzzle, and that’s our ratio of adjusted capital. We take the net worth of every company—the accounting net worth, all the assets less all the liabilities—divided by the shares outstanding. Then we apply an algorithm to see where the stock floors and ceilings are, and we buy when they’re at a floor and sell them if they inflect off a ceiling.
What we’ve tried to do is invoke more science and less art in what we do. By imposing these four pillars, these tools, we’re more disciplined than the next guy. We’re trying to marry the bottom-up and the top-down to get the best of all worlds. None of this is revolutionary; this was all an evolution of all of our years in the business—and particularly what we learned from past mistakes. The macro pillars were built on the heels of the great recession.
Our TRAC could be a revolutionary thing—it’s just that other people haven’t clued into it—but everything else we did was not rocket science. Our TVM model is based on John Burr Williams’s model that was developed in the 1930s. We had epiphanies of our own that were able to fill in some of the blanks so we could perfect what we were doing, but it’s still just evolution. We don’t view ourselves as trying to predict; it’s more assessing the probabilities.
The way we look at it is, our key philosophy is value. We’re trying to buy something that we appraise at a dollar for a fraction. We’re trying to get what Ben Graham, father of investment analysis, coined many years ago as a “margin of safety,” meaning if we’ve got our appraisal wrong and it’s not worth a dollar—it’s only worth 80 cents, yet we’ve only paid 80 cents or less—we’re going to take less of a loss because we have that cushion built in. You’re only going to know that on a probabilistic basis because you can’t know everything. We’re trying to stack the deck in our favour, and part of doing that is diversifying—not having positions that are too big. It’s also having an element of concentration; you don’t want to have 200 names because you won’t know them well enough. There’s a happy medium there.
Also, part of de-risking is assessing the balance sheet to make sure there’s not too much debt. We try to de-risk on a bunch of different levels, including looking for investments that are out of favour, though you can’t be completely zigging. You don’t want to be contrarian for the sake of being contrarian. You have to have common sense.”
THE BOTTOM LINE
CEO & portfolio manager
Years in the business
Where did you start your career?
As a corporate finance analyst.
Describe yourself in three words
I have no idea—you can’t describe anyone in three words! People are more complicated.
Advice to those just starting in finance
Buffett says the same thing—read everything you can. If you’re coming into finance, read everything you can about and by successful investors because you’re going to learn from their years of experience.