tag:blogger.com,1999:blog-5389144729834496735.post6946190381897876316..comments2024-03-17T05:15:55.634-04:00Comments on The Brooklyn Investor: The Perils of Trying to Time the Market III Unknownnoreply@blogger.comBlogger18125tag:blogger.com,1999:blog-5389144729834496735.post-86870619325669188372015-01-13T16:12:03.149-05:002015-01-13T16:12:03.149-05:00Hi,
Yeah, that was one of my favorite books earl...Hi, <br /><br />Yeah, that was one of my favorite books early on in my career. Rem (can't spellit) of a Stock Operator, Market Wizards 1 and 2 were all bibles in my world. <br /><br />I also did work at one of these big, legendary shops and saw up close what goes on, so I have an understanding of how that works. <br /><br />Maybe I will make a post about that at some point. <br /><br />But let's put it this way; those guys operating very, very differently than the top down, macro-based mutual fund guys. Most of those guys have performance based on whether they were bullish or bearish the market (hedged at the right time, unhedged at the right time). They can't make the Soros-like British Pound bets etc... No way they can get that sort of exposure/leverage in a mutual fund structure. <br /><br />If you did take one of the great traders like Soros or Druckenmiller, and then told them to make money by owning a long portfolio of stocks and then hedging according to their market views, I am 100% sure they would have underperformed the market. They would no way be able to outperform if that was their basic strategy. <br /><br />Similarly, if you told Buffett to pick longs and shorts based on what he thought stocks in the S&P 500 index would do, I bet he too would do much, much, worse than the market. This is why Wall Street analysts are wrong in aggregate. If Buffett had to say, "buy", "sell", or "hold" on every single stock out there, he would do no better than Wall Street. <br /><br />The key is, he doesn't have to do that! <br /><br />And the key with macro hedge fund traders (as opposed to top-down market timers; which are two very, very different things!) is that they don't have to be right all the time, and when they have a view, they can take a massive, leveraged bet and then stay out the rest of the time. <br /><br />market-timing mutual funds have to be right all the time because they are always long, flat or short. They don't have other options like the macro trader hedge funds do. <br /><br />Anyway, thanks for dropping by! I do get it. kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-14887635831679706352015-01-13T15:52:30.799-05:002015-01-13T15:52:30.799-05:00"What is baffling to many was how some of the..."What is baffling to many was how some of these guys can be so absolutely 100% wrong in their predictions and pronouncements and yet keep earning high returns year in and year out (at least way back then)."<br /><br />U need to read the "real time experiment" part of Soros's first book, Alchemy of Finance. In it, he generates a something like a 120% (going on memory) return in less than 18 months. There is a key part where he states something like, "I find it odd that all my ideas are wrong, but I am still up significantly". That is not an exact quote either, but if u read it u will identify it. That segment of the book teaches allot about how macro trading works. Natnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-48081065160473651872015-01-12T12:01:22.420-05:002015-01-12T12:01:22.420-05:00The table is compared vertically, I think, and not...The table is compared vertically, I think, and not horizontally, so I don't think it matters that the time span for each side is different. In each case, the volatlility is lower as the holding period is increased. <br /><br />I think the data differs due to data availablility. MSCI data may not go back as far... <br />kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-10383655719305423512015-01-12T11:36:14.500-05:002015-01-12T11:36:14.500-05:00Oops, that was sent prematurely.
Also, you are r...Oops, that was sent prematurely. <br /><br />Also, you are right to question what the street is selling. They will try to sell whatever happens to be working (and looking good) at the moment. <br /><br />But from having watched the industry for years, the street is more about encouraging "activity". They want to sell put options to hedge, call options to lever up, they want you to sell defensives and buy cyclicals when the economy looks better and vice versa. They want you to buy foreign stocks and funds when the dollar is weak and vice versa. etc. <br /><br />The biggest proof, though, is where is the Graham and Doddsville of market timers? Buffett can point to a bunch of people who do what he does and have done well over decades and through cycles. <br /><br />But who are the market timers that have proven over decades and through cycles that they have done it well? And where is that group who did the same thing with good results? <br /><br />Believe me, I have been looking for someone since early on in my career and I can't find any! Most of what I find are more similar to the funds I show in my previous "Perils" posts.<br /><br />What typically happens is that someone calls a turn correctly and becomes a star, raises tons of capital and never does well again. Or sometimes someone calls two or three turns correctly and are treated as heroes only to go on to never be right again. I can name a lot of names (if I include funds, newsletter writers etc...) but won't bother. We can all remember the stars that "called Black Monday" or called the 2000 internet bubble crash or called the financial crisis etc...<br /><br />So if someone wants to invest in a fund that sounds really too good to be true, remember that it has happened many times in the past with similar results; I've seen it over and over again. kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-74183871694730489902015-01-12T11:21:58.590-05:002015-01-12T11:21:58.590-05:00Thanks for dropping by. You raise good points and...Thanks for dropping by. You raise good points and I understand your skepticism. But my opinion is hardly based on what "someone" says. Well, Buffett, Munger, Greenblatt and all of the superinvestors of Graham and Doddsville and many others say it, so to me, that counts for a little bit more than just "someone" says so.<br /><br />But of course, we don't just blindly listen to anyone however much we admire them. My whole career has been on Wall Street and I can tell you honestly that I don't know anyone who has successfully timed the market over time. I've read many, many newsletters over the years too (mostly when I was at a hedge fund; I don't subscribe to timing letters) and have seen nobody do it consistently (contrary to many claims). <br /><br />Buffett has also said that in his more than 50 years in the business, he hasn't seen anyone do it either. <br /><br />So this is a little more than just "cuz someone says so...". <br /><br />OK, there are macro hedge funds that have done well. Say, Soros/Druckenmiller. But these guys made money by more than just market-timing. There were highly leveraged macro traders. In fact, many of their calls on the stock market have been very wrong over the years, but huge bets and wins like the busting the pound more than make up for their misses in other areas. This is not the way the alternative, macro mutual funds are run. <br /><br />My first "Perils" post was back in September 2011: <br /><br />http://brooklyninvestor.blogspot.com/2011/09/perils-of-trying-to-time-market.html<br /><br />I didn't cherry pick these funds; they are the only ones that I was able to think of that had a track record over multiple cycles. Here's a follow up I wrote last year: <br /><br />http://brooklyninvestor.blogspot.com/2014/03/perils-of-trying-to-time-market-ii.html<br /><br />kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-25085477797788279912015-01-12T10:37:03.038-05:002015-01-12T10:37:03.038-05:00Market timing is "perilous" because &quo...Market timing is "perilous" because "someone" says it is. Seems like the investment industry is swinging a pendulum towards dumbing down investors with this " don't try to actively manage / or seek out active management" mantra. This at the very time when a growing population of underfunded boomer aged workers are going to need intelligent approaches and options that produce alpha above and beyond a standardized 7% "target date" return inflexibly provided by the giant "indexing" ideaologists. Our society has made it that we have to rely on the financial and real estate markets for our income needs and have now cornered us into using certain "products". Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-67564108418632945622015-01-10T19:05:30.212-05:002015-01-10T19:05:30.212-05:00A little less than a year ago I decided to dabble ...A little less than a year ago I decided to dabble in the alternative space. I bought AQR Style Premia Alternative I QSPIX and am very happy. I was impressed with Antti Ilmanen's "Expected Returns" and since QSPIX is based on his work...I invested. Wanted to reduce equity exposure and couldn't stomach any more intermediate term bonds. So far so good. Will be interesting how it performs in an equity correction. Matt P.https://www.blogger.com/profile/08455609649406249128noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-21414438628347046972015-01-10T18:53:50.480-05:002015-01-10T18:53:50.480-05:00I am troubled by the analysis presented in figure ...I am troubled by the analysis presented in figure 2. The monthly, 5-year, 10-year returns are not drawn from the same sample spaces and yet we compare their standard deviations. They seem like apple and orange comparison to me (from a statistical point of view). Also, frequency of loss by itself is a misleading metric; what matters most is the magnitude of gain/loss. RKhttps://www.blogger.com/profile/08585567259753050713noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-56350644343599860222015-01-09T13:15:10.613-05:002015-01-09T13:15:10.613-05:00Nice post, I completely agree. It's funny you...Nice post, I completely agree. It's funny you did an individual stock CAPE. I didn't do a CAPE, but looked at individual companies back in 2011 when bears were saying that the market is overvalued and profit margins are unsustainable. I scratched my head at the time as I owned a bunch of stocks and none of them seemed overvalued to me, and as you concluded with XOM, none of them seemed to have bloated, unsustainably high profit margins. The stocks I put in the table aren't necessarily the stocks I own (I just picked, honestly, a bunch of big, representatitve blue chips). <br /><br />Here is that post: <br />http://brooklyninvestor.blogspot.com/2011/12/us-corporate-profit-margins-headed-down.html<br /><br />By the way, I didn't mean Hussman's fund in my post (it was a different one). But I do sort of think he is a really smart guy even though, like you say, I agree he focuses on the wrong, unknowables. <br /><br />Analysis of market valuations like that can be highly misleading (as it was in 2000 when the market looked (and was) incredibly overvalued, but there were a lot of attractive stocks individually).<br /><br />Also, historical indicators can be very misleading and can evolve over time. Back in the 50's, I think, dividend yields went below interest rates for the first time, and this was an unthinkable, unimaginable event. Stocks were seen as speculative so it was natural to think that they had to have higher yields than bonds. <br /><br />Those that sold stocks and bought bonds because of that probably regretted that, and they would never have gotten back in (if they waited until dividend yields got back above interest rates. I guess they can get back in now, though, lol...). <br /><br />Also, for many years, I think 4% was the lower bound for dividend yields in the market. Those that got out because of that also never got back in. <br /><br />So these big indicators can be useful sometimes, but depending on them too much can really screw things up. <br /><br />Thanks for dropping by... <br />kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-14481499296308767242015-01-09T12:43:39.246-05:002015-01-09T12:43:39.246-05:00I wrote something similar about Buffett versus, sa...I wrote something similar about Buffett versus, say, Hussman, a couple of weeks ago, but you said it better I think. I'd love it if you would look at my post, but I understand if you don't have time. http://dumbmoney.tumblr.com/post/106070028711/what-exxons-cyclically-adjusted-earnings-ratioThe Dumb Moneyhttps://www.blogger.com/profile/09796381033790706388noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-46401967646797068172015-01-09T11:05:04.325-05:002015-01-09T11:05:04.325-05:00Hi,
Bridgewater has done well over time. Also, ...Hi, <br /><br />Bridgewater has done well over time. Also, I do know that there are (and have been) some highly successful macro traders over the years, including Soros, Tudor, Moore etc. Some of these guys don't even have to be right 50% of the time since they take such huge, leveraged bets and keep short leases on trading positions. So they can try and and get out of trade ten times in a row for small losses and then finally get it right and hit a home run (more than making up for their small losses). <br /><br />What is baffling to many was how some of these guys can be so absolutely 100% wrong in their predictions and pronouncements and yet keep earning high returns year in and year out (at least way back then). <br /><br />So it's a little different than what some of these macro-based alternative mutual fund guys are trying to do. <br /><br />Anyway, how these macro hedge funds make (or not) money is whole different topic that I might talk about one of these days on this blog. kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-34165528361803806462015-01-09T10:32:08.372-05:002015-01-09T10:32:08.372-05:00Interesting post. I think some of your questions ...Interesting post. I think some of your questions & critiques are off. We can get into a long discussion about this, but there is one simply way that macro funds (including Bridgewater) can (and do) perform: finding asymmetric bets. i.e. the hit rat may well be low, but the return distribution skewed. There are a lot of ways to get that type of pay off, but that is one key way macro is different from value investing, where it seems like there is a bigger emphasis on the hit rate. I've seen one analysis done within a bank that shows that the average hit rate for its traders were basically 50/50, but they still made money every year. Many profitable CTA funds have hit rates well below 50%, as far as I know. Of course the best guys combine a high hit rate along with asymmetric payoffs, but the point I want to make is that you don't have to be consistently right > 50% or even 30% of the time to make money, which you didn't say in your post but seem to imply. <br /><br />And I agree that hedge funds as a whole are not likely to provide alpha going forward. There is simply too much money relative to the addressable opportunity set. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-81487636205385313122015-01-09T06:42:09.735-05:002015-01-09T06:42:09.735-05:00Thanks for mentioning Gotham funds. I was actuall...Thanks for mentioning Gotham funds. I was actually going to mention it in the post but forgot. Gotham funds is different as they don't allocate capital based on macro factors. Greenblatt doesn't sit there and try to make macro forecasts and build portfolios around it. The portfolio is built using the same magic formula-type approach but with shorts added. <br /><br />And I am usually skeptical of long/shorts too, but again, Greenblatt is someone that has a very good long term track record of actually making money and has written some really good books and I trust his judgement. He was no fan of long/shorts either, but he thinks he has figured it out. <br /><br />In Greenblatt's case, he got to doing long/short to try to help individual investors from getting in and out of the markets at the wrong times (which he noticed people did even with the magic formula). So for him, it's been a step-by-step, 'let's-help-the-little-guy' process.<br />kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-40522021162514699452015-01-09T06:37:53.995-05:002015-01-09T06:37:53.995-05:00Well, lottery tickets keeps selling even after yea...Well, lottery tickets keeps selling even after years of poor performance for most buyers. Whenever there is a bear market, people will seek out funds that promise not to get killed in the next crisis. At the top of the next bull, people will abandon these funds as it will have severely underperformed the market. kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-14966653723585650022015-01-09T06:34:37.247-05:002015-01-09T06:34:37.247-05:00I think they needed lower volatility so they can a...I think they needed lower volatility so they can allocate more capital to a strategy; they wanted it to look more like stocks, bonds or real estate in terms of volatility (but with low correlation to them). kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-49650513489030069782015-01-09T01:44:54.929-05:002015-01-09T01:44:54.929-05:00Also, what about GONIX (especially out of the Goth...Also, what about GONIX (especially out of the Gotham funds), which promises pretty much to do what you said was very dangerous? It's interesting to me because the very justifiable reason for closing the Formula funds and opening the Gotham funds was to reduce volatility, which Greenblatt said people couldn't handle.innerscorecardhttp://innerscorecard.conoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-86283041764032459552015-01-09T01:20:36.338-05:002015-01-09T01:20:36.338-05:00Why do you think this kind of investment approach ...Why do you think this kind of investment approach still has so many assets being managed if it is so intrinsically bad? Is it some kind of sick behavioral appeal?innerscorecardhttp://innerscorecard.conoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-40423450384182866932015-01-09T00:12:46.157-05:002015-01-09T00:12:46.157-05:00Wonder if Institutions that ask for low volatility...Wonder if Institutions that ask for low volatility realize that they are reducing the option value of their LP status. With a leveraged, geared, or focused fund, the LP value increases as some of the risk is shifted to the GP, which in a sense helps to justify the high fees. I doubt anyone expected the hedge fund fee structure to be viable for these very large funds. The allocators have been completely snookered. Natnoreply@blogger.com