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Peter Langerman

Franklin Mutual's Langerman: Data Overload Hurts Investors

Data is cheap and ubiquitous. Active investors need to read the human emotions driving the market, says Franklin Mutual's Peter Langerman.

The explosion of investment information that has been made available to the general public in recent years would seem at first glance to represent an unalloyed good.

Access to all that information gives people an opportunity to make better investment decisions, right? Yes, but that’s not the full story, says Peter Langerman, CEO of Franklin Mutual Series and co-portfolio manager of the Franklin Mutual Shares Fund and the Franklin Mutual Global Discovery Fund.

All that information and the speed at which it becomes available can lead to an overemphasis on the short term by both investors and companies, he maintains.

Langerman, 62, shared his view on this and other topics in a recent interview. He comes at the issues from a wide-ranging background, which includes a B.A. in Russian studies at Yale, a stint as an accountant at Arthur Young, a period as a lawyer at highly esteemed Weil, Gotshal & Manges, and three years as director of New Jersey’s Division of Investment, where he oversaw state pension funds. What are the most important developments you’ve seen in the investment business during your career?

Peter Langerman: There’s the increased availability of information, the speed of information, and the speed at which transactions can take place. That has compressed dramatically. There are positives and negative to that.

Democratization of information is positive. Then there’s the impact on investment behavior. If you have information faster, you are more likely to react faster. Sometimes that is good, but sometimes it leads to behavior that doesn’t enhance value. If you’re always waiting for the next information, sometimes it’s false. Sometimes it distorts behavior in a way that doesn’t ultimately benefit investors. Sometimes everything can’t be assimilated in 22 seconds. It’s great that there’s so much liquidity. But holding periods of securities and funds is getting shorter and shorter.

It’s a good thing that people can change their mind seamlessly and cheaply. The flip side is that it creates a momentum of its own, and maybe there is too much short-termism and churning.

Corporations can get caught up in that too, [because they also become beholden to the short term]. People might make more thoughtful decisions if they moved more slowly. It’s difficult to ignore short-term implications, so sometimes balance gets distorted. Companies and investors have to deal with the balance of what’s better for the short term and what’s better for the long term. What changes do you see taking place in the investment business going forward?

PL: These trends will continue. More information will be available, and the question becomes how it’s utilized. How does an investor take data and use it to invest wisely, not just in the next minute or hour? The people who are able to provide insights will be of great value.

People [money managers] will have to figure out what differentiates my products that quants [quantitative managers] can’t do inexpensively. There’s an increasing commoditization of things that society provides. It will be less expensive to get the same services. But if you want to be special, what can you provide that artificial intelligence can’t? That’s the challenge of the next 40 to 50 years.

The challenge for analysts is the same that it always has been: to see insights that the market isn’t. It may take different skills for analysts to provide that extra piece. It may be more difficult because of democratization of information. That makes it hard to distinguish yourself. People are talking about quants doing it all.

Adding value beyond that will have to be what’s next. There are always human emotions involved in markets. Even if there’s quantitative analysis, it’s people who are programing computers. Human judgment, human emotion, human nature is always a part of it. What are people missing? That will always be part of adding value. Can you talk about your investment philosophy?

PL: One of the hallmarks here is figuring out where we can buy assets at a discount to intrinsic value. Where is the market missing the story? Where is emotion keeping people from getting involved? That’s our edge. Look at the numbers and understand what is motivating management and what’s the market reaction. That hasn’t changed over the years.

Any successful investment organization has to have a consistent approach toward looking at the market. Computers and quantitative measurements may change over time. But the issue for us remains what’s driving companies and where are companies mispriced. Interaction with management is part of it. We are big believers in talking to managers. What do financial advisers do well, and where could their performance improve?

PL: The key is how to add value for your client that they can’t otherwise access. It’s important to have a balanced approach for the timeframe of evaluating investments. It’s a mistake to turn over the portfolio every month. There’s a feeling you need to do something to justify your fee. But sometimes it’s helpful to step back and think about a considerable period of time, taking advantage of opportunities, but taking a breath and a balanced approach.

Advisers should think about what can I give—access, insight or maybe just handholding. Clients don’t need their advisers to access a lot of things anymore. There are so many things being thrown at people. It’s sifting through these things that matter. You want to build value over time.

People enjoy investing, but they want some degree of security and prudent money management. That hasn’t changed over the years. Fitting that into a more active and dynamic world is more challenging, and that’s what financial advisers should be providing.

The old cliché is that a little information can be dangerous. People need advisers who can say here are all these [investment] possibilities, but also how the pieces should work together. It can be confusing. It’s easy to get infatuated with the fad of the moment.

There’s an element of psychology for every adviser. My guess is that financial advisers have to play that role more now than in the past, because it’s easy to get the basic information. It’s a matter of providing things for clients that they can’t provide for themselves.

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