Use access key #2 to skip to page content.

buy and hold beats a really good hedge fund??? (analysis)

Recs

17

October 08, 2009 – Comments (60)

If you bought stocks in 1950 (as far back as yahoo finance data goes) and simply held until today (presuming an index fund had existed then), you would have earned about 7%/year as the S&P rose from 17 to ~1100 (from jan 1950 until jan 2010).  Adding in a 3%/year dividend that makes for a 10% return. If you bought stocks in jan 1960 and held until jan 2010 you would have made an average of 6%/year.  Adding in a 3% dividend, thatgets us to 9%/year. From 1970 to 2010, 6.5% + 3% = 9.5%.  From 1980 to 2010, 8% + 3% = 11%.  From 1990, 6% + 3% = 9%.  

Taking a quick look, right now we are 33% down from a recent high (the oct 2007 high).  Buying at any point where the S&P was down 33% from a recent high and holding for 20/30/40 years yielded these returns:

from the dip in 1970 we have a 20 year return of 11.3% (including a 3% dividend), a 30 year return of 14.5% (inc divi), and a 40 year return (to april 2010 assuming S&P 1100 then) of 10%. From the dip in 1974 (not the bottom of the dip, but the sides of the dip when we were down 33% from the previous high) we have a 20 year return of 11.5% and a 30 year return of 12%. Etc. 

The point of this introduction is this:  buy and hold has yielded about 10% since 1950 and has yi8elded even better returns of ~11-12% if you buy and hold from a point when the market is significantly off a previous high.

Now, buying and holding may involve selling out of some given stock or other at some point, and you may incur some taxes on your returns here and there.  Plus, you will be taxed on your dividends (at lets just say 20%, the rate that you will pay soon and previously).  So lets say that the annual tax rate on your buy and hold stocks is 10% and 20% on dividends.

Now the 7% becomes more like 6.3% and the 3% dividends move to 2.4%, leaving you with a 8.7% return.  Or, assuming that you buy when the market is significantly down from a previous high, more like 9-10%, after taxes. This assumes that you buy index funds with extremely low loads/fees, like SPY, which seems to have tracked the S&P almost perfectly since its inception.

 

So you make 9-10% from here, based only on history, and not being too optimistic, just buying SPY and sitting around.  And remember, we are calculating those returns tonow, a time when the market has been in the toilet for literally 12 years (not up in 12 years) and still vastly down from its values just 10 years ago, this is one of only 2 times (the other being the 70's) since WW2 when stocks have performed this badly for this long.   

 

Now, lets say that you invest some money with a hedge fund that makes a 20% return each year (before fee's and taxes) and runs at a 2% annual fee + 20% of the profits.  And lets say that it makes 20% each year like clockwork.  Where does that leave you?  Thats better, right?

Well, ... from reading the blogs of various hedgies and seeing how frequently they move in and out of things, and assuming that basically all of the profits are subject to income tax rather than capital gains tax,...  

You would have made 20%.  But you would pay 2.2% in fees (based on the average of.8 your assets over the course of the year), leaving 17.8%.  Then you pay 20% of the profits, or 4%.  Now you have 13.8%.  And you are taxed every year via income tax (lets just assume that between federal and state this is 40%) on the 13.8%.  So you pay 5.5% in taxes.  This leaves you with 8.3%. 

Worse than buy and hold.  

Buy and hold = 9.7% in the last 60 years, higher when starting from a point where the market is well down.

A 20%/year hedge fund with (not all that high for the hedge fund industry) 2% fees and 20% of profits yields...  8.3%

Taxes are compounded frequently, fee's are compounded frequently, and it takes literally 3x the return (from a hedge fund setup) as it does from a buy and hold setup to JUST BREAK EVEN. 

 

If hedge funds serve wealthy clients, as is typically said to be true, how honestly do they serve them?  We assume this hedge fund makes 20%/year every year and never blows up.  But haven't the preponderance of them eventually blown up?  Didn't the preponderance of them blow completely up last year?  

Based on this quick analysis and a year of evaluating various hedge funds and listening to their sales pitches and learning about markets and investing...

it looks like the rich folks that put their money with the hedgies are, truly, not better off than somebody dollar cost averaging into SPY.  

They would have the benefit of no massive life-altering draw-downs like 2008/early 2009 (the hedge fund in this example is smooth and consistent).  But, frankly, there is no reason to believe that hedge funds are consistent and not likely to implode about as often as the market itself implodes.

This short analysis doesn't look good for the hedgies, at least the ones with traditional 2%/20% fees.

 

60 Comments – Post Your Own

#1) On October 08, 2009 at 12:44 AM, awallejr (81.33) wrote:

How many hedge funds do you know that consistently return 20% annual returns tho?  Even Madoff only "fudged it" at 12%.  There are simply too many variables involved in investing.  Buy and hold can work with the right stock, but sure as hell sucks with the wrong stock (GM anyone?).  You really do need to keep an eye on your choices since that "thesis" for buying a stock can change.  But pick the "right" stock and sure, buy and hold works wonders in the long run.

 

Report this comment
#2) On October 08, 2009 at 12:58 AM, portefeuille (99.59) wrote:

And you are taxed every year via income tax ...

-----------------------------

An investor will still pay tax on any profit it makes when it realizes its investment, and the investment manager, usually based in a major financial centre, will pay tax on the fees that it receives for managing the fund.

-----------------------------

(from here, emphasis mine)

So the investor does not usually pay income taxes every year but every time he realises gains.

Report this comment
#3) On October 08, 2009 at 1:04 AM, portefeuille (99.59) wrote:

-----------------------------

Typically, hedge funds charge 20% of returns as a performance fee. However, the range is wide with highly regarded managers charging higher fees. For example Steven Cohen's SAC Capital Partners charges a 35-50% performance fee, while Jim Simons' Medallion Fund charged a 45% performance fee.

-----------------------------

(also from that wikipedia entry)

which brings me to my Christmas 2008 comment.

-----------------------------

#2) On December 24, 2008 at 11:14 PM, portefeuille (99.99) wrote: + james simons of renaissance technologies

-----------------------------

(from here)

If you know what you are doing it is apparently possible to make it "worth it" even when you take 45% performance fee ...

Report this comment
#4) On October 08, 2009 at 1:06 AM, portefeuille (99.59) wrote:

Report this comment
#5) On October 08, 2009 at 1:50 AM, Tastylunch (29.46) wrote:

Worse than buy and hold.

If hedge funds serve wealthy clients, as is typically said to be true, how honestly do they serve them? 

The assumption you are making is that wealthy clients are capable of realizing 10% returns on their own unaided. Most individual investors left to their own devices do not seem to do so for one reason or another. 

The ones that outperform like my grandfather did for several decades usually spend a fair amount of time on investing(and/or money, He had a value line subscription since the 1940's until his death). Frankly that's something most people just aren't willing to do. 

And there has been no evidence to suggets that wealth by itself is strongly predictive in stock market success. Martha Stewart is classic example of a very successful business person who is pretty terrible at stocks. People remember her in the ImClone scam but what they forget was her portfolio also got crushed that year as well (if memory serves).

successful investing/trading is it's own skill set and for most it requires a lot of practice to be good at.

another factor to consider is that the majority of the "wealthy" are naturally fairly old (compared to the general populace) and  grew up in a time when the knowledge access gap was greater than it is now. In the 1960's and 1970's the average investor paid a ton more per trade in comissions than they do now and got information considerably later than the wall street crowd. These old truisms still permeate a lot of "common knowledge" about stocks despite being considerably less true today.

So yes an investor should be abe to to do better on their own (and many do) but a good deal lack the interest, expertise or discpline to do so.

Ths why mutual funds, hedge funds etc still exist and why managed money will always likely exist in some form.

I agree with you that hedge funds may not be good deal for most of us (unless you get in one of the best like Klarman's or by some miracle Rentec), but I do think they make a lot of rational sense for a lot of people.

 

 

 

Report this comment
#6) On October 08, 2009 at 1:52 AM, Tastylunch (29.46) wrote:

whoah weird I wonder CAPS keeps messing with my fonts.

 anyway I forgot to say nice post checklist. You always put thought provoking stuff.

Report this comment
#7) On October 08, 2009 at 3:28 AM, checklist34 (99.73) wrote:

awall, ...  thats the point.  20%/year would be a very lauded hedge fund after several years i'd imagine, the manager would be famous, and he'd be on CNBC all the time.  And hedge funds don't, as far as I can divine, universally (or even usually) live up to their billing of sheltering their investors from black swans or market fluctuations.  Look at the runaway implosions in the hedge fund industry in the last 18 months.

So this very good case (though perhaps not "best" case) appears to lose to basic buying and holding of an index fund like SPY.  Imagine how it'd compare to buying and holding the highest dividend yielding stable companies...  (a strategy which I tend to think has seriously beaten the market over the fullness of time).

Buying and holding GM from 1996 would have been a bad deal.  Buying and holding GM from 1966 on the other hand, probably paid off well (dividends), from 1936 it probably retired many, many people.  

Its not buy and go-braindead, its not buy-and-forget, its buy and hold until a company does not appear to be worth holding anymore or becomes very overvalued.  Thats why I included a 10% annual tax rate on equity gains in the example above.

 

Report this comment
#8) On October 08, 2009 at 3:33 AM, checklist34 (99.73) wrote:

the bottom line is that someone who bought GM's IPO and held forever would have far, far, far, far, far, far, far and away come out ahead.  They'd have made what?  100x their money in dividends? 

If they'd have sold when GM was no longer worth holding they'd have done even better.

But anyway...  Porte, after reading "the edge" at real money silver, watching mad money, and reading the comments of the various money managers on real money silver I can only conclude that the average hedgie hands his/her clients gains almost entirely of the short-term, income-taxed variety.  Fast money would be another example.

These people are in and out, and looking for 1 or 2 or 5% gains on things and then in and out and in and out.  Its all short term income tax -vs- long term capital gains.  

Which has a material effect on overall net returns.  Basically the 10% annual tax rate that I showed above would mean a holding period of roughly 1.5-2 years (depending on when, cap gains tax rate has varied here).  If you held for 5-10 years each (say MO which I'm fairly confident buying in 1999 and holding until you're an old man would be a great investment) the net tax rate would be far less.

 

Report this comment
#9) On October 08, 2009 at 3:37 AM, checklist34 (99.73) wrote:

Tasty,

    Thanks much for the compliment and same to you.  :)

     I'd just offer that...  does the average hedge fund beat the market or does it do well for a year or 3 and then implode, and shut down?  Only to have its manager start anew?

     And, in the exmaple above, my point is that simply buying SPY and holding it for a long period of time (especially from a time when stocks are down significantly from a recent high, like now) has yielded 10%.  Similarly, dollar cost averaging into SPY probably has yielded 10% since WW2. 

     And that doesn't even require thinking much less skill.

     And what I'm offering is that this may well beat even a very good hedge fund from the clients perspective.

      Now imagine if the "client" or self-investing person... just bought Dreman's book and followed its guidelines, focusing on dividends?

 CL

Report this comment
#10) On October 08, 2009 at 3:45 AM, checklist34 (99.73) wrote:

http://www.amazon.com/Contrarian-Investment-Strategies-Next-Generation/dp/0684813505/ref=sr_1_1?ie=UTF8&s=books&qid=1254987476&sr=1-1

Using essentially that and a couple really good calls, visible in my march blogs,  I'm currently up 200+%.   or 6 1/2 yeas at 20%

or about 15 years of a steady 20% from a hedge fund with 2%/20% fee rates.  

15 years of 20% via a hedge fund in 10 months.  And I think there's still room to run here...

I'm not entirely happy about all this.  It'd be nice to think that somewhere is this guru person who can manage this important part of my life for me, doing better than I can, making more, being reliable, leaving me with nothing to worry about.

But i'm coming to accept that I either become my own fund or I seriously underperform.  Ultimately, its on me to get a good return.

Report this comment
#11) On October 08, 2009 at 4:39 AM, portefeuille (99.59) wrote:

Let's call the hedge fund investor I1 and the do it yourself investor I2.

If the initial investment of I1 is a and the gross return is r1, then the fees are

a * c1 + a * r1 * c2, where c1 = 0.02 (2% management fee) and c2 = 0.2 (20% performance fee), so after fees you have 

a * (1 + r1 - c1 - r1 * c2) =: a * (1 + r2) giving you the return after fees r2

r2 = r1 * (1 - c2) - c1.

The after tax return r4 is

(1 + r4) = (1 + r2)^t * (1 - r3) + r3, where r3 is the income tax rate.

To have the same return after tax that I1 has after fees and tax I1 needs the gross return r5

(1 + r5)^t * (1 - r6) + r6 :=  (1 + r4), where r6 is the tax rate for long term gains ->

r5 = ((1 + r4)/(1 - r6))^(1/t) - 1 =  (((1 + r2)^t * (1 - r3) + r3 - r6)/(1 - r6))^(1/t) - 1.

Let's insert some numbers.

t = 10 (10 years investing period), c1 = 0.02, c2= 0.2, r1 = 0.2 (20% gross return), r3 = 0.4 (40% income tax rate), r6 = 0.25 (25% tax on long term gains) ->

r2 = 0.14 (14% return after fees)

r4 = ca. 1.624 (ca. 162.4% after tax return for I1)

r5 = ca. 0.122 (ca. 12.2% gross return needed for I2 to have the same return after tax that I1 has after fees and tax).

So I2 would need a gross return of ca. 12.2% p.a. to keep up with I1 investing in the 20% p.a. gross return hedge fund.

For t = 100 you get r5 = ca. 13.75%, for t = 50 you get r5 = ca. 13.5%, for t = 20 you get r5 = ca. 12.8%, for t = 1 year you get r5 = 11.2%.

 

Report this comment
#12) On October 08, 2009 at 4:43 AM, portefeuille (99.59) wrote:

These people are in and out, and looking for 1 or 2 or 5% gains on things and then in and out and in and out.  Its all short term income tax -vs- long term capital gains.

The hedge fund itself does not pay taxes.

-----------------------------

The legal structure of a specific hedge fund – in particular its domicile and the type of legal entity used – is usually determined by the tax environment of the fund’s expected investors. Regulatory considerations will also play a role. Many hedge funds are established in offshore financial centres so that the fund can avoid paying tax on the increase in the value of its portfolio. An investor will still pay tax on any profit it makes when it realizes its investment, and the investment manager, usually based in a major financial centre, will pay tax on the fees that it receives for managing the fund.

-----------------------------

(from the same wikipedia entry)

Report this comment
#13) On October 08, 2009 at 4:45 AM, portefeuille (99.59) wrote:

So for 10 years, 25% tax rate on long term gains and 40% income tax rate the answer is: ca. 12.2%.

Report this comment
#14) On October 08, 2009 at 4:49 AM, portefeuille (99.59) wrote:

so, investor, if you think you make 10% and the hedge fund makes 20% give your money to the hedge fund manager.

Report this comment
#15) On October 08, 2009 at 5:04 AM, checklist34 (99.73) wrote:

wrong, porte.  if you make 10% (after taxes) and the hedgie makes 20% (before) give your money to yourself.

Tax rates are currently 15% + state and 35% + state for capital gains / income tax.  A 20% difference.

Buy and hold and slower trading by definition means that you are in capital gains territory, not in income territory.  

Hedgies are, i'm nearly convinced, almost completely in the realm of income tax.  If you pay taxes on 7%/year (historical since 1950 S&P avg) in cap gains once every few years, your next tax rate winds up less than 20%/year due to the effects of compounding, I used 10% as an estimate.

If you pay 40%/year (reasonable estimate of federal+state) taxes, your returns are reduced every year (creating a compounding effect) -vs- once, say, every 5 years.  

A hedge fund, also, by virtue of being long and short and trading all the time, probably has basically only income tax (also very little dividends,... you pay out divi's for short positions -vs- collecting them for long positions). 

Trade, trade, long, short, panic, hop around in a circle, change your mind, short the REITs and Casinos in February, presumably go long them for 5x higher prices in August, panic some more, short something, then go long something, panic some more.  Flop.  

Its all 40+% income tax.  

Buy and hold is sub 20% capital gains/dividend tax.  

Its a huge difference.

 

Report this comment
#16) On October 08, 2009 at 5:11 AM, portefeuille (99.59) wrote:

wrong, porte. 

Please have a look at my comments #2,11,12 above.

Report this comment
#17) On October 08, 2009 at 5:11 AM, checklist34 (99.73) wrote:

if you can make 10% and the hedge fund can make 20%, make your 10%.  you'll win in the end.

there is no 25% on long term gains, its 15% + state, being raised to 20% + state.  Income is 35% + state being raised to 40% + state.

and you don't net 20%/year on capital gains, because you don't pay it ever year.  The compounding effect of yearly income taxes (due to the pass-through nature of hedge funds where investors pay taxes on gains how the gains were made, which are I have come to believe baslically all income tax gains).  You would pay net much less than 20%/year, I estimated 10%/year.  

If you simply bought SPY in 1950 and sold in in 2010 when the S&P was at 1100 ( i realize SPY didn't exist in 1950) you'd have made a whopping 63x your money.  So you're 63x your money and you pay (federal and state) 20%.  Now you are 50x your money. AND YOU MADE 3% DIVIDENDS EVERY YEAR AT 20% TAX YOU COULD REINVEST. 

If you made 15%/year at 40% income tax you'd not be nearly as well off, as taxes compound every year.  Throw in the 2% hedgie fee ...

I stand by my assessment.  10% self-attained via longer term buy and hold stragies beats 20% hedgie returns.

Report this comment
#18) On October 08, 2009 at 5:12 AM, checklist34 (99.73) wrote:

i'm right, porte, please have a look at my various comments hereunder and take a realistic look at tax rates.

10% buy and hold beats 20% hedgie

Report this comment
#19) On October 08, 2009 at 5:21 AM, portefeuille (99.59) wrote:

here are the results for a 20% long term gains tax rate.

1y: ca. 10.50 %

10y: ca. 11.72%

50y: ca. 13.35%

so, investor, if you think you make 10% and the hedge fund makes 20% give your money to the hedge fund manager. 

Report this comment
#20) On October 08, 2009 at 5:34 AM, checklist34 (99.73) wrote:

porte i am drunk and no longer willing to consider figures, but I'm confident in my earlier calculations.

if you buy and hold for, say, 60 yeras (buy in 1950, sell in 2010) you would have made 7%/year cpaital appreciation (so 63x your money), you'd pay (state + federal) 20% taxes, leaving you wiht ~50x your money.  Or about 6.7%/year.

Assuming divi's of 3%, you'd pay about 20% on those, leaving 2.4%.  thats 9.1% for buying and holding.

 

If you make 20% via a hedge fund and assuming that you pay a 2% fee to said hedge fund manager...  and 20% of the profits...

you pay 2.2%/year to said manager (time-average of 2%).  That leaves you with 17.8%.  

You then pay 20% of 20% or 4%, leaving you wiht 13.8%.  You then pay 40% of 13.8%, or 5.5%, leaving you with 8.3%.

It takes 21-22% hedgie returns to beat 60 year S&P buy and hold returns.

 

Report this comment
#21) On October 08, 2009 at 5:37 AM, checklist34 (99.73) wrote:

so, investor, if you can make 10% (return + divis) buying and holding, buy and hold, and laugh at your rich neighbor who uses a 20%/year hedge fund, assuming such a hedge fund even exists.

Remember, probably 75% minimum of hedge funds make less than that.  I don't have stats, but i'd guess thats dman minimum.

or just buy Dremans book and beat the crap out of both buy and hold OR hedgies.  Without even using your brain.

Or be a Checklist and make 1 good call (see my march blogs) and follow Dreman and beat all of the above so badly its laughable. 

:)

 

Report this comment
#22) On October 08, 2009 at 5:38 AM, portefeuille (99.59) wrote:

Just in case it got lost. The annual gross return that I2 needs to achieve to have (having paid long term gains tax) the same return (for the entire period) that I1 has (having paid income tax) is given by

r5 = ((1 + r4)/(1 - r6))^(1/t) - 1 =  (((1 + r2)^t * (1 - r3) + r3 - r6)/(1 - r6))^(1/t) - 1,

where t is length of the investing period in years, I1 is the hedge fund investor, I2 is the do it yourself investor I2, r3 is the income tax rate of I1, r6 is the long term gains tax rate of I2 and

r4 = (1 + r2)^t * (1 - r3) + r3 - 1 is the after tax return for I1 for the entire period.

Report this comment
#23) On October 08, 2009 at 5:40 AM, checklist34 (99.73) wrote:

porte, you needed to assume greatly closer than is real tax rates for long term or divi -vs- short term to promote the hedgies.

+ precariously few hedgies make 20%/year for very long periods of time.

buy and hold wins.  

admit it, sign the papers

Report this comment
#24) On October 08, 2009 at 5:41 AM, portefeuille (99.59) wrote:

okay, have a sober look at comment #22 tomorrow, put in some numbers (use a spreadsheet, should take about 90 seconds via copy&paste) and you will agree that there is no mistake in my calculation. The step by step derivation is in comment #11.

Report this comment
#25) On October 08, 2009 at 5:47 AM, checklist34 (99.73) wrote:

i don't think there is any flaw in my calculation.

and i don't think that more than 10-20% (and either of those could be generous) of hedge funds yeild 20% annually.  

And I don't think that if a hedgie had a really bad year and blew his fund up that he'd continue working til he got back to his "high water mark", no I think he'd be likely to just trash it and start over.

do you dare to dispute this:  buy and hold almost without any question beats the crap out of median or mean hedge fund returns?

Report this comment
#26) On October 08, 2009 at 5:49 AM, portefeuille (99.59) wrote:

a nice check is to take the limit t -> infty. the result is 14% as it should be since in that scenario (if you can call it a scenario, hehe) the tax rates do not matter (as long as they are greater than 0 and less than 100%).

$100 -> $120 - ($2  management fee + $4 performance fee) = $114 -> 14%. 

Report this comment
#27) On October 08, 2009 at 5:52 AM, portefeuille (99.59) wrote:

i don't think there is any flaw in my calculation.

The "flaw" is that you have no calculation. In science, what you did is called "hand waving argumentation", which is fine to some degree but in this case not entirely sufficient.

The "high water mark" is irrelevant if the fund makes 20% every year. 

Report this comment
#28) On October 08, 2009 at 5:52 AM, checklist34 (99.73) wrote:

porte, i am actually maybe an academic.  But i'm a damn unique one.

i'm not a college graduate.  Nor am I close.  I did get a better grade than my profesor in first year quantum mechanics, I do have enough math and physics credits for a minor (if I gradutated in something), and I am the only guy in one american college to get an a in some calc based stats or whatever it was math class.  I was typically very, very drunk in those years.  I now only drink about once a week, but I do it thoroughly and leave msyelf thoroughly defiled each time, lol.

The ultimate lesson that I have shown here is very clear and as far as I can see indisputable:  the hedgie industry exists to transfer wealth to itself as the expense of the greater good.  Any given hedgie may actually benefit, but by and large considering that it takes a REALLY good hedge fund to beat just buying an dholding SPY in the fullness of time, they are losing bets that enrich themselves to the detriment of their clients.

What the CAPs game blog should hope to accomplish is teach Dreman.  See the link above.  

I am now about 15 years ahead of a 20% hedge fund by basically following Dreman (and m aking one great call), I absolutely don't doubt that many peoplecould beat the market and practically al hedgies by just following Dreman.

It really is that simple, people really are that herdishly dumb.  It really is that simple.

my car is on TV right now, thats weird.

Report this comment
#29) On October 08, 2009 at 5:53 AM, portefeuille (99.59) wrote:

fine to some degree

fine to a certain extent

Report this comment
#30) On October 08, 2009 at 5:54 AM, checklist34 (99.73) wrote:

i'll add it up in the morning porte, but i bet i'm right.  I bet my drunk ballparking is close enough to demonstrate that hedgies are losing bets.

BTW, what hedgie makes 20%/year consistently for 60 years?  show me, show me, show me

Buffet, BTW, is the most blatant buy and hold advocate ever (just buy when cheap).

Report this comment
#31) On October 08, 2009 at 5:56 AM, portefeuille (99.59) wrote:

Well, I answered the question, maybe someone can use the answer. Why don't you finally start your own hedge fund and I can do some research for you.

Report this comment
#32) On October 08, 2009 at 5:58 AM, checklist34 (99.73) wrote:

if i start a hedge fund, BTW, I will

A)  offer 15-20%/year for 1% fee period and guarantee that return (if thats even legal)

or

B) take some fraction or percent of the after-tax returns BEYOND THE RETURNF OF THE s&p.  I'll be the first guy to really actaully honestly put my money where my mouth is.

A) is attainable without even black swan risk if one is wiling to look deep enough into the possible combinations of commodities futures options equities dividends and such.  Honestly, zero risk 15% is doable.  And I don't mean "zero" like buying and holding MO is zero risk, I mean mathematicaly Black Monday zero.  Just look at all of the tools available, and how they might be combined, and it'll come to you.

B) is a boneheaded function of probability.  buy market crashes, fire up A) in between them.

godspeed, spiderman

Report this comment
#33) On October 08, 2009 at 6:00 AM, checklist34 (99.73) wrote:

porte, WRT #31, ...

what hedge fund returns 20%/year with 2%/20% again?

are you sure you did your  math right?  

I think we wind up with 8.x% as I showed above, -vs- about 9 for buy and hold.  I may now go to bed.

Report this comment
#34) On October 08, 2009 at 6:02 AM, portefeuille (99.59) wrote:

okay. let me know when I can start developing some hedge fund investment ideas, hehe ...

Report this comment
#35) On October 08, 2009 at 6:09 AM, checklist34 (99.73) wrote:

the way hedgies go wrong is basically what dreman describes.  he describes the limitless desire of people to predict and understand and learn and know.

he describes the reality that probabilities dominate talent like 9X% of the time.

play probabilities, that is how i went 3.X my money and counting since the S&P was only 15% lower than here.  I'm looking at 200+ % outperformance.

and what i'm saying is that the ultimate hedge fund (its not like most of them actually do better than this) could make 15% with zero risk.  Nol long/short I am smart so I win long/short zero risk, not "we're largely market neutral" zero risk.

I mean zero risk, zero blakc moday, zero risk, zero 0, period.  What do you think?  how would you do that if you knew it could be done (I assume most people assume it can't so they never look).

Report this comment
#36) On October 08, 2009 at 6:25 AM, portefeuille (99.59) wrote:

unrelated.

Hang Seng China Enterprises Index



enlarge

Report this comment
#37) On October 08, 2009 at 11:35 AM, bigpeach (30.79) wrote:

You guys are funny to listen to. I did a similar exercise here, though I was focusing on traders, not hedgies with additional performance fees. I don't think most people realize how well they have to do nominally to overcome additional fees and taxes. This sort of expected scenario analysis is nice, but a stochastic simulator (mine is by no means perfect) is really the way to go for this sort of thing. I'll modify mine and post results.

Report this comment
#38) On October 08, 2009 at 1:59 PM, Tastylunch (29.46) wrote:

portefeuille

I have no doubt there are some hedgies that print 20% regularly without running a Madoff ,however I would bet (and i have no evidence to back this up ) that majority don't come close.

It's just that it seems like most of them do because the big names are in the media a lot (chanos, paulson, Klarman, Soros etc). You dont usually see CNBC interview guys whose fund blew up.

That top decile/quintile of hedge funds (baupost, greenlight, etc) really drive a lot of the vehicle's outperformance has been my understanding.

If the hedgie doesn't deliver you a fairly large outperformance of the market than they likely aren't worth it given the fees and taxes.

checklist34 

I'd just offer that...  does the average hedge fund beat the market or does it do well for a year or 3 and then implode, and shut down?

probably closer to the latter, although it's been my observation that they only relaly implode if external forces make it happen.

But to be fair the same is true of stocks.

How many publicly traded companies are still around from 1900 besides GE?  There is significant survivorship bias in the indices since they continually rebalance, kickin out the duds.

So in either case you still have to select the right vehicle and critically now when/if you need to leave it.

In any event I agree with you.  In most cases you are better off on your own (unless it's one of those really really great funds like Rentec.

Plus it's more fun.

 And I don't think that if a hedgie had a really bad year and blew his fund up that he'd continue working til he got back to his "high water mark", no I think he'd be likely to just trash it and start over.

or even worse they go take the CEO job at Citigroup.

I'm not entirely happy about all this.  It'd be nice to think that somewhere is this guru person who can manage this important part of my life for me, doing better than I can, making more, being reliable, leaving me with nothing to worry about

If you got enough jack, I'm sure you can find a good fund if you really wanted to. I doubt many are going to print 200% gains often though given their size and risk profiles (hey they are "hedge" funds after all)

or you know you could load up on Berkshire Hathaway stock. That's kinda like being in a Buffett hedge fund, assuming you are comfortable with him being 78 and not knowing who his successor is.

But I really do think given what they know and what they are willing to do Hedge funds are a rational decision for a lot of investors.

I really think reading one book (whether it's Dreman, Graham or O'neill) is more than a surpisingly large amount of people are willing or even think to do.I know many folk who are willing to accpet subpar returns for not having to work. To many people the time saved is more important than the money earned.

Fortnately for my family my grandfather liked doing the 1,1 method from value line. Pretty dang easy to do as long as you take the 15 minutes a week and pay the flat subscription fee to do it. Plus it scales pretty well unlike a lot of good strategies.

last I looked it had a history of 6+decades of outperformance

porte i am drunk and no longer willing to consider figures, but I'm confident in my earlier calculations.

haha great disclaimer!

bigpeach

greta post, thx for the link. I missed the first time around.

Report this comment
#39) On October 08, 2009 at 4:03 PM, bigpeach (30.79) wrote:

Here you go. Some additional food for thought. I left everything the same as described except added the 20% performance fee, increased the expenses to 2% and changed the average return to log(1.1) to get to your 10% annual return on average. Under the lognormal price model, Pt/P0 = exp(x) where P = price, x = continuously compounded returns, so if I want P1/P0 = 1.1, x = log(1.1). One thing to keep in mind is that capital losses can be used to offset ordinary income tax, which makes the tax penalty from paying immediately less than you might initially think. Of course then there's the question of having enough income tax to offset. For simplicity, I just allow negative tax. Anyway, my model shows the hedgie would need to beat the individual investor by 5.5% annually (on a gross basis) at the median.

Pctile      5 Year  10 Year  15 Year  20 Year
1%         80.2%   70.7%    64.2%    58.0%
5%         86.3%   80.0%    74.0%    69.5%
50%       102.8% 105.0%   105.2%  105.4%
95%       116.0% 127.8%   139.3%  149.0%
99%       119.1% 132.8%   148.3%  163.4%
Average  102.2% 104.7%   105.8%  106.9%

Report this comment
#40) On October 08, 2009 at 4:07 PM, bigpeach (30.79) wrote:

sorry, x is normally distributed with mu = log(1.1), not x = log(1.1). By the way, I assume tax is paid each year as does Checklist. Port seems to disagree, I don't know tax law surrounding hedge funds. If it was structured as a mutual fund, it would pay tax every year.

Report this comment
#41) On October 08, 2009 at 6:44 PM, portefeuille (99.59) wrote:

(from here)

more on (hedge fund) taxes in chapter 14 of that book.

Report this comment
#42) On October 08, 2009 at 6:55 PM, portefeuille (99.59) wrote:

If you are a U.S. citizen you may have trouble investing in an offshore fund so the hedge funds you could easily invest in might indeed pay quite a bit of taxes. (see this)

Report this comment
#43) On October 14, 2009 at 3:15 AM, checklist34 (99.73) wrote:

bigie peachie said

You guys are funny to listen to. I did a similar exercise here, though I was focusing on traders, not hedgies with additional performance fees. I don't think most people realize how well they have to do nominally to overcome additional fees and taxes. This sort of expected scenario analysis is nice, but a stochastic simulator (mine is by no means perfect) is really the way to go for this sort of thing. I'll modify mine and post results.

Peachie, I got this warning from the doc that I was ... literally, and I don't mean to make light, doomed.  Then I waited 5 weeks for test resutls and when they came back they said "there's no concern here, nothin gto worry about".  So I didn the only rational thing, which was go on a 6 day drunk.  I mean, if you just found out that you have your health after expecting to die, the only thing that it makes any sense to do is to try and destroy your heealht.  Think of it as a covered call in a relentlessly up market!  It hurts your overall well being, but... the alternate outcome is worse.  lol

I drank 2 straight days (day and night) and then took 1 1/2 days off (mostly sleep) then drank 2 straight days again.  I probably had 50 or 60 drinks adn 10 or 20 smokes and my lungs felt like someone dumped drano in them and my organs were on the verge of failure.  lol

my point was just that it takes a BRILLIANT hedgie to match buy and hold, fullness of time.  My point stands.  I will evaluate porte's math and what not belwo in this thread.

Report this comment
#44) On October 14, 2009 at 3:36 AM, checklist34 (99.73) wrote:

porte said

Well, I answered the question, maybe someone can use the answer. Why don't you finally start your own hedge fund and I can do some research for you.

it is done.  currently its a fairly small fund at under 9 figures, consisting entirely of money of friends family and former business partners and self.  This means i'll have to stop chasing skirts and drinking too much on weekdays!  oh well, ... frankly, its no different, i have managed these funds since january anyway.  

fire ideas away.  

I wrote once months ago that this market and these times belonged largely to "simplifiers", people who were willing to make assumptions based on limited information and a "preponderance of simple logic" -vs- complex calculations or macroenonomic thesis.  Or whatever.

For exmaple:  "genworth is trading at 0.14 of book value, its likely to wind up considerably higher from here" or "dow chem is the 2nd biggest chem company in the world and better at what it does than anybody else i've ever dealt with at 7 bucks its brainwash" or "ASH isn't going broke it isn't going to violate its covenants (simple calculation there) and its trading at 40% of its previous all time low, lets buy as much as we can!

simplification has won this year, complexisizing has lost.  I am currently about 15-20 years ahead of Kass.  He's clearly more knowledgeable and expireienced than I, I have clearly won.  Add it up.

I may be awake enough to debate your formulas, but my point stands.  You are hihgly unlikely to beat basic buy and hold buy buying into a hedge fund.  Maybe 5/100 hedgies match it for a while...  until they blow up.  

its sad.  I either manage my own money or I lose.

offer hedgie ideas anytimne, thats kind of what CAPs is about.  I'll be in Europe in 2 weeks for a week or two.  I plan on drinking too much and offedning the locals.  let me know if you want in on that.

Report this comment
#45) On October 14, 2009 at 3:39 AM, checklist34 (99.73) wrote:

tasty:  stocks come back eventually.

an imploded hedge fund is a permanent loss, as the manager will simply shut it down and try again to avoid the curse of the "high water mark"

huge, huge difference

Report this comment
#46) On October 14, 2009 at 3:47 AM, checklist34 (99.73) wrote:

i will, unfortunatley, have to work on the math again tomorrow, i'm just not in the mood.  I will be back to do it and the 20% hedgie won't win, i promise.  :) 

but for tonight I cannot be boethered with calculation or consideration, but I may find the energy to just blabber a little.

Report this comment
#47) On October 14, 2009 at 4:43 AM, Tastylunch (29.46) wrote:

checklist34

the assumption you are making is that you would have 100% loss from the hedge fund implosion (which I think is very unlikely, chances are you would at least get something back) and 100% of your assets in it.

You can have a 100% loss in any given stock you know.

Still your point is a good one given that most people when they participate in a fund allocate a high % of their resources to it.

it is done.currently its a fairly small fund at under 9 figures

That is awesome! congratulations and good luck! Hah if you got that goin on for you I'm amazed you spend any time here. You certainly don't need us.

 fire ideas away. 

Dunno if I have any you haven't seen. but I'll throw a couple out.

I like CEP, it's a Jakila the Hun suggestion so I cna't take full credit for it.

It is still extremely below book and has large amount of proven Natural gas reserves. If Gas stays at 6 dollars it can be profitable again. Obviously natural gas has rallied a lot lately and there is a major oversupply issue pagung natural gas which could really wreck stuff in the short term, but I think CEP is worth considerably more than it's trading at today in either the event of an liquidation or firming of the Nat gas market.

I also was bullish on chinese water plays but RINO and TRIT have since moved up 100% or so since I got in so I'm looking elsewhere ( I really really wish CAPS would let us rate sub 100 million market cap stocks as that's where I mostly invest) 

I think Brazilian equities are likely to outperform for the next couple years as they build their infrastructure for the Olympic games. Typically Summer games countires rally ard into the year of the games then crash the year of the games. Also Brazilain equities could double as a Dollar hedge, if you are bearish on the USD.

I guess a lot depends on what style you like growth vs value and how large you need the company to be given your fund's size.

I don't know what kind of plays you like

 I know Porte is interested in ATPG, CRME and AIXG at the moment...

its sad.  I either manage my own money or I lose.

at least you have that option. Many of your peers I imagine  aren't as talented/interested as you to make self investing really worthwhile.

Now that you have your own fund I suppose you could hire some underlings to do a lot of the grunt work for you. There are several young minds in CAPS who might be up for it (anticitrade and Jakil the Hun come to mind)

Well I wish yu the bets of luck and hope you enjoy your vacation!

 

Report this comment
#48) On October 14, 2009 at 4:46 AM, Tastylunch (29.46) wrote:

alos checklist you may like this service

it's claled alpha clone, it basically lets you copy some of the best known hedge fund portfolios as they add positions

http://alphaclone.com/

might be of use to you.

Report this comment
#49) On October 14, 2009 at 4:51 AM, Tastylunch (29.46) wrote:

I should dislcose I'm long CEP from 3.20

Report this comment
#50) On October 14, 2009 at 5:08 AM, ozzfan1317 (78.46) wrote:

If you want examples or stocks you can Hold forever, KO,BP and MSFT come to mind.

A smaller company worth a look is EBIX just my 2 cents its why its offered for free..lol 

Report this comment
#51) On October 14, 2009 at 7:40 AM, portefeuille (99.59) wrote:

I know Porte is interested in ATPG, CRME and AIXG at the moment...

I have not really looked at those all that much. I will though ...

Report this comment
#52) On October 14, 2009 at 7:54 AM, portefeuille (99.59) wrote:

Some info on AIXG is here. They are a spin-off of RWTH Aachen (a university) and I am somewhat familiar with the company. I don't have an "official" opinion on the shares yet. Some info on CRME is in the comment section of this post. The only stock I would more or less "officially" recommend without doing too much additional "research" is EMC.

Report this comment
#53) On October 14, 2009 at 1:44 PM, Tastylunch (29.46) wrote:

portefeuille

I have not really looked at those all that much. I will though .

hah well I knew you talked about them a lot.  I guess misinterpreted your interest. Did you know just issue an "outperform" on AIXG ? or am I mistaken?

Just one of the many perils of trying to research stocks online... I suppose

I apologize for any errors on my part.

Report this comment
#54) On October 14, 2009 at 1:55 PM, Tastylunch (29.46) wrote:

yup there it is

#818) On October 06, 2009 at 1:25 AM, portefeuille (99.99) wrote:

AIXG - end market perform - 27.45 - new rating: outperform

 

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=121799 Report this comment
#55) On October 15, 2009 at 5:10 PM, TigerPackFund (< 20) wrote:

TigerPackFund = alphaclone?

Tasty, checklist34, portefeuille,

We are creating one terrific, free resource for individual investors here on CAPS.  The TigerPackFund's goal is to put together the best team of investment minds, and successful free thinkers out there (from a group of tens of thousands of stock market junkies on CAPS) and generate one unique webpage of profitable selections!

You guys need to send us some of your picks.  I love going to the TigerPackFund page to review everyone's picks each day, and having just ONE PAGE to click on, to find a list of the best ideas out there on CAPS.

We (myself and the other 10 or so contributors) would be humbled and happy if the three of you could add your two cents, so I (and everyone else that wants to) can make some money off your brainic reasoning and insight!

Can you image what a resource it would be, if you clicked on TigerPackFund and could find 200 GREAT STOCK INVESTMENT IDEAS for FREE, any day of the week? We could probably help CAPS increase viewership by leaps and bounds and get an incredible increase in hits to our own home pages, plus new readers adding our names to their Favorites list.  In time, I can see hundreds if not thousands of investors adding our TigerPackFund webpage directly to their Favorites list on their computer web browsers, bypassing most of the CAPS main pages.

PLEASE, this is a one-of-a-kind chance to link up and continue making outsized gains, without having to surf CAPS in search of good ideas each day.  In the end, we each are helping the others participating and ourselves in a myraid of ways with the small effort involved.

P.S. I will quit writing these pleas for help, if you send a few picks to TigerPackFund@yahoo.com in the coming weeks or tell me you don't want to participate.

-TigerPack

Report this comment
#56) On October 15, 2009 at 5:30 PM, prose976 (< 20) wrote:

Historically, a well-managed portfolio must hit 15% - 17% gains before it will beat buy & hold.

It is fairly easy to do this.

However, most money managers lean more toward the b & h because it's difficult to actively manage millions or billions of dollars/shares, and individuals, for the most part, entrust their money to the money managers.

Buy & Hold counts on dividends to fill in part of the gap between their portfolios and those which are actively managed.

So both are correct.

Buy & Hold WILL beat a good hedge fund, because the fund cannot actively manage away the dividends it misses or the fees it incurs.

But a hedge fund is millions and billions of dollars and shares, so it just can't compete with a small portfolio which is actively managed.

Ultimately, a small, actively managed portolio will smash any larger fund (hedge or other) percentage wise.  It's just easier to leave your money with a manger.

Fool on!

Report this comment
#57) On October 15, 2009 at 8:19 PM, checklist34 (99.73) wrote:

porte, I'm going to start a new blog when time allows to follow up on this, but for now, lol... Apologies for a very drunken set of slurred posts, and I can only assume that your math was correct as you seem very mathematically inclined. I, ahem, had a long month that ended well and went on a 3 day drinking bender which resulted in .... ahem...  drunken posting.  I will one day be banned from the internet for drunken posting, but for now they're still putting up with me. 

 Anyway, I built a spreadsheet modeling divi's reinvested and taxes & hedgie returns for my tax bracket for 60 year historical S&P gains and 20%/year hedgie gains where the taxes are all income.  Its 9.8% return for the 20% hedgie net to me whic does indeed beat buy and hold over that period.  It may not have beaten buy and hold from 1950 to 1999... (we're in prolonged very bad period for the S&P 500 which of course will reduce buy and hold results).  But it didn't beat it by enough to say its defnitely better.  For example... ending in 1999 for buy and hold would change the result.  And also, a hedge fund that gives 20%/year for 60 years without blowing up must be all but non-existent.  Buy and hold is of course readily doable for anybody. 

Also, i had a long conversation about your comment aobut that I was using loose logic instead of doing math.  It wasn't inspired by you it was brought up by him.  He just said the ohter dya "do you remember how dilligent we used to be in estimating market size and running spreadsheet after spreadsheet on costs and sale prices and overhead to determine the viability of a potential business?  And here we are just winging it on a new idea that will cost more to start than any of the other ones.  How weird is that?"

I said "wow, you're right" and we talked about it for a while.  Then we dug up our old spreadsheets and calculations and estimates and...  chuckled at how wildly they were off the mark. 

We pondered why we'd become so diferent in estimating and calculating things, and how dramatically simplified our analysis process had become.  And we ultimately just settled on it being a combination of severely limited time (as we got busier in business we had less and less time to make decisions as day to day life takes over so much of your time/energy), fatigue (the process of starting and failing and ultimately having one that got big) from years of 80-110 hour work weeks, and... the fact that the estimates were never even remotely close anyway.

What are sales going to be next year?  They will be what they will be, thats one of the key lessons we learned in business.  Predicting htem is a fools game as there are so many, wildly many, variables. 

I read Dreman again over this week, and he discusses the wild errors in analyst estimates and how more informatio nand data hadn't ever actulaly made them more accurate, he quoted studies showing that accuracy for doctors and psychologists and wall street analysts and other things never got better after a certain amount of information.  A few pieces of information gave the same level of accuracy as 50 pieces. 

Half that book is about psychology, the rest about statistics and odds.

And I really want to take a moment and make a good blog about the risks of over-analyzing things (it just can't be done) and the power of simplifying things ... even the need to simplify things, ...  and the power and necessity of sticking to a "play the odds" approach to investing. 

Take economics.  Smart presumably extremely well educated economists that have thought, presumably, a great deal about the current situation have come up with conclusions ranging from "what we're doing is the right thing, we should stimulate more and take on more debt if we have to" to "this debt and stimulus will be the end of the US". 

Kass called S&P 1100 for year end 2009 in December 2008.  He called a stunningly close prediction fo rthe S&P through september (end of summer) in March, complete with a graph.  It played out almost exactly as he predicted then.  Yet somehow between then and now he .. changed his mind or lost sight of his own prediction, and went bearish at S&P 930 despite having twice predicted a run to 1050-1100 by the end of summer.  He, who has been more close and accurate than any public figure i'm aware of through this whole mess, outsmarted himself more o rless. 

The whole key here is to stay disciplined and honest to goodness play the odds. 

But i'm driving to Michigan from Wisconsin as I post this, sucks and I want to actually take a moment and try to make a good post out of these thoughts instead of my usual off-the-cuff rants. 

Report this comment
#58) On October 16, 2009 at 2:04 AM, portefeuille (99.59) wrote:

And I really want to take a moment and make a good blog about the risks of over-analyzing things (it just can't be done) ...

-----------------------------

 

Mistakes of Omission, Trading, and the Downside of Detailed Due Diligence

 

Despite our strong performance to date, this has been a challenging investment year in some
respects, principally because of errors of omission. We have missed some opportunities or
otherwise not acted with sufficient aggressiveness in acquiring certain new positions. The
beauty of errors of omission is that they are largely undetectable by clients as long as they go
unreported by managers. Because I believe that owning up to one’s mistakes in a public fashion decreases the probability of those errors reoccurring, I do so here.

The principal misses this year have been positions that we initiated in late Q1 and early Q2 at prices we believed to be extraordinarily attractive – YUM Brands in the low to mid-$20s, various REITs, Saks Inc. at less than $3 per share, and one or two others which we failed to buy aggressively as prices rose quickly from the market bottom. Trading is largely an art and not a science, a discipline in which you can always look back and conclude that you could have done it better. That is one of the reasons why portfolio managers hire traders (it enables the portfolio manager to shift the blame to others) and why being a trader is such a treacherous job.

We seek investments in which there is a wide spread between price and value and then complete sufficient due diligence to obtain high conviction in our analysis. As a result, when we find something we would like to buy, once we have completed our work, our general approach is to buy as much of a particular security as we can without disturbing the price until we reach our targeted position size. In some cases, securities decline as we buy them (the ideal situation), in others they stay at approximately the same price, or alternatively they rise in price(the problematic case).

One of the reasons why we prefer liquid securities to illiquid situations is because of the greater
probability that we will be able to acquire a position at or around the price that our analysis was
based upon. Unless we believe that at the time of purchase, it is a once-in-a-lifetime buying
opportunity (think GGP), we typically leave some room to increase our position if the price/value relationship becomes even more favorable in the future. Unlike many investors, we
do not take token positions as we begin work and then add to positions as we build conviction.
We are either all-in (while often retaining a “re-buy” ticket in our pocket), or we keep our chips
in a large pile of U.S. Treasurys.

In the first half of this year, enormous market volatility created opportunistic, albeit temporary,
buying opportunities in a large number of companies. We took advantage of some of these
opportunities, but missed many more. Part of our failure to execute on these situations is the
nature of our approach. There were many potential opportunities in which we could have
comfortably invested 1% of our capital based on the limited amount of due diligence we had
completed in the time available, but we have no interest in building an overly diversified
portfolio about which we have limited understanding, even though this approach would have
worked well at the recent market bottom. We have always believed in managing a concentrated,
high-conviction portfolio that requires detailed, in-depth, and often time-consuming analysis.
The benefit of our approach, however, is that once we find an investment that is extraordinarily
attractive, we can confidently invest a meaningful percentage of our capital. The downside is
that if security prices are rising quickly, we will miss some opportunities.

I focus on hidden mistakes in this letter because we have had few unforced errors this year. Our principal mistake has been selling certain investments too soon, although we are comforted by the fact that a substantial portion of the funds realized from selling these positions were
subsequently invested in what we believe to be more attractive situations.

Perhaps the best example of selling too soon is the sale of our substantial position in Cadbury
PLC that we purchased originally in early 2007 and sold in the third and fourth quarters of last
year. We exited Cadbury because we believed that the dramatic deterioration in the credit
markets would significantly postpone the likelihood of a sale of the business, thereby delaying
the catalyst for potential value recognition. We underestimated the rapidity of the recovery of
the credit markets and missed out on the opportunity for an attractive sale to the strategic buyer
whom we had previously identified as the likely acquirer. We were wrong.

-----------------------------

(from here: Pershing Square Q2 2009 Investor Letter (pdf))

 

 

Report this comment
#59) On October 16, 2009 at 2:08 AM, portefeuille (99.59) wrote:

-----------------------------------------

Ackman Devoured 140,000 Pages Challenging MBIA Rating

By Christine Richard and Katherine Burton

Jan. 31 (Bloomberg) -- It was the $109,000 photocopying bill that hedge fund manager William Ackman says made him realize how much he'd read and underlined before betting against bond insurer MBIA Inc. in 2002.
His law firm charged him for copying 725,000 pages of financial statements and other documents, 140,000 of them about MBIA, to comply with a subpoena. Following New York and U.S. probes of his trading and reports, Ackman persisted in challenging MBIA's AAA credit rating for more than five years, based on his own research.
Ackman may soon be proved right. MBIA, the largest provider of insurance against defaults in the global credit market, today reported a fourth-quarter net loss of $2.3 billion because of the declining value of mortgage-related securities it guaranteed. The independent research firm CreditSights Inc. this week said MBIA's credit rating may be downgraded. Ackman had warned that MBIA was magnifying its risks by backing instruments such as those based on loans to the least creditworthy homebuyers.
``It's in the nature of a shareholder activist to be persistent,'' says Ackman, now 41. ``I've been persistent because it's an important issue. People are obsessive about stupid things. They are persistent about important things.''
In the MBIA documents, Ackman says he saw that the insurer was guaranteeing untested asset-backed securities. He also found a reinsurance transaction that allowed the company to downplay a loss. MBIA agreed in January 2007 to pay $75 million to settle U.S. regulators' inquiries into that deal.

...

-----------------------------------------

Report this comment
#60) On October 16, 2009 at 4:42 AM, checklist34 (99.73) wrote:

very interesting as always, porte.  you are a wealth  :)  I have to visit europe for Haloween i think this year, probably belgium is as close to Germany as I'll get.   

If I was going to short-sell something, I would damn sure read ... maybe not 140,000 pages, but plenty. Thats a dangerous game. But buying stocks in this crash was a simplifiers game. Someone willing to make a choice and commitment based on the "preponderance" of the evidence and not the exhaustion of it. A glance rather than a delving.

simplifier: the market has crashed wildly, dramatically, every other time this has happened it has been a phenomenal buying opportunity, betting that "this time is different" is rarely smart, so lets buy.  Simple:  markets always come back eventually, this is one hell of a crash, lets buy.  In fact, lets buy whats cheapest. 

Complicator/hyper analyzer: the market has crashed its true, but that one guy on the CAPs game posted a graph that showed the S&Ps p/e is high so what about that?  and will citi be nationalized?  and what if the sky really falls?  is the stimulus right or is it wrong?  what would a potential future driver of economic growth be absent housing?  What sector will lead the recovery?  did banks properly mark assets down?  I am concerned about buying when unemployment is so high.  returns are still good once a recovery has clearly taken hold.  I see Casino stocks are down but ... fundamentals in Vegas aren't good... 

And these are all good questions and points, no doubt.  But by the time anybody sat down to really make peace with them all and draw an elaborate thesis, it was over, and the simplifiers had already won. 

Does the average hyper-analytic hedge fund beat Dremans "just go with the numbers" strategy?

I do not mock the analyzers.  I just observe that the sum of the parts that is wall street and its fluctuations and returns is too complex to be analyzed.  Nobody will ever get it right trying to analyze everything every time.  Ken Heebner got it right amazingly for a really long time.  And blew up once. 

The lesson I am trying to take here, for myself and whomever wishes to risk thinking my opinions are valuable, is that ...

To date I have won on every stock pick that I've made and stuck with.  I cleaned up dozens of things I was down on after the Nova Chemical buyout in February...  I'm only down on BOFL to date, but I will win big on that in the end.

This risks me getting a "smart guy" complex where I think I'm the master of making stock picks.  It may be true that I have a talent for that...

but mostly i've played the odds. 

1.  I bought inot a big market crash

2.  i bought stocks far, far from thheir previous highs

3.  i bought stocks cheap in relative and absolute terms (price/book, price/normalized earnings, forward pe, etc.)

4.  I held them.  to date i haven't traded out of really any positions except LVS and WYNN which I still own, but severely hedged. 

5.  I focused on small caps as small caps have historically done better, and particularily so when coming out of a bear market

6.  I bought stocks that were distinctly out of favor

I just played the odds.  Result:  +250% and counting (+350 from the botom at least, I need to calculate that).

 

Is the smartest thing for me to do ...  deciding i'm smart and coming up with hypothesis about this and that and hte other thing or ... just playing the odds.  Wait until the odds massively favor a position and take it, even if that means a long time in between finding these "sure bets".

In my life ...  a "sure bet" existed in the Nasdaq bubble.  pets.com and the rest of the dot coms HAD TO come down 10 times or more.  Buying puts and hedging with a long call would hav ebeen a "sure bet" with enough leverage to make big money.  Even CSCO and QCOM and the rest HAD TO come down. 

And buying in late 2008 early 2009 had myriad "sure bets".

I am not preaching, porte, nor condemning anyone as much as ... observing and planning.  :) 

Report this comment

Featured Broker Partners


Advertisement