Tuesday, May 27, 2014

Unrealistic Expectations or User Error? The Media and Contrarian Investing

Unrealistic Expectations or User Error?  

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One sure bet is to bet against the media, another famous magazine cover was also from Business Week, only it was 34 years ago.  The title was "The Death of Equities" which came out shortly before the largest bull market in history. 

August 13, 1979

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Magazine Cover Indicator

I only wonder where hedge fund performance would be were it not for the Fed and other central banks pumping liquidity into the market?

...again anyone?

It ain't over until "the fat lady sings".   Takeaway...hedge funds are not a replacement for being long equities or fixed income, structured properly, they are their own asset class, and inserted into a portfolio correctly, they "should add truly non-correlated alpha.  A properly constructed portfolio should have long equities both domestic and international, emerging markets, non-aggressive and aggressive fixed income, commodities, managed futures, FX, and yes, hedge funds in various flavors.  I would also add real estate and timber.  If running a portfolio like that today, one would be re-balancing out of the superior performing equities and into those asset classes that have not done as well.  Today that would be managed futures and hedge funds. 
The importance is picking those who stick to their expertise, hedge funds are run by people, and people have clients that read the media and put pressure on their hedge fund managers when they underperform, also since hedge funds make their money only when they make money for their clients, I suspect that many long / short funds have been lifting their short positions to participate in this non-fundamental liquidity driven market.  In the end, many of these funds are really not unlike the average investor, they chase return.  
Financial markets are a powerful example of Darwinism, it will pressure every strategy, approach, and asset class at some point in time to excruciating pain.  This is good, it weeds out weak, sick, and old.  More often, it eliminates the return chasers.  If you know this going into the investment business, that there will be times that your style will be under such pressure that you want to change your stripes, you will have a better chance of making it through.  Only the weak cave in.  However, this assumes that the underlying thesis of your approach is sound.  If it's based on time tested factors like valuation and mean regression.
If the mandate is institutional, managing a portion of an overall portfolio then communication is consultative ...what are the theoretical and academic underpinnings, when a strategy works, how it works, when it doesn't, how it correlates with other portfolio components, etc.
If one managing the entirety of a clients portfolio, like wealth management then be holistic, be diversified AND re-balance, even when it seems crazy to lighten up on a out-performing asset class and reallocate into an underperforming one.

Today that would be managed futures and hedge funds.  Note, these adjustments are on the margin, no market timing here, just "buying straw hats in the winter".
Lastly, it's at the tails of return distributions that the greatest mistakes are made.  If you can manage the tail risk through proper asset allocation, and not cave into chasing return, which your clients and the media will pressure you to do in under-performing times, with a little luck, you might loose the sprint but win the marathon.
  Blake Singer - Portland 5/26/14

Tuesday, May 15, 2012

The Trading Sardine


A company that bases its valuation, indeed its entire business, on the Trading Sardine principle (see below) should be judged not by analysts but by fishmongers. Better yet, by their wives...


The Trading Sardine

Andy convinces Billy to buy a can of sardines at a high price by telling him how wonderful they taste. Billy, being greedy, decides to resell them to Charlie for a profit at an even higher price by convincing him, too, about how great these sardines are. The process is repeated several times until the last buyer, let’s call him Zebediah, pays a million bucks to Yorick for a can of the “world’s absolute best sardines – EVER..."

Zebediah decides to open the can and eat the sardines, only to discover they are ordinary, plain sardines. Furious at being swindled, he yells at Yorick: “You crook! You liar! I paid you a million bucks for plain ordinary sardines. They were not the greatest tasting sardines - EVER!” yells Zeb.
Yorick shrugs and replies…

“Hey Zebediah, you're such a schmuck! Those were not eating sardines – them were trading sardines!"