Trovena Weblog

The Folly of Randomness

I'll write more on this later but this is a great piece from the WSJ on how sometimes we look at random events and see superior skill. Wall St. regularly takes these random events and markets them as skill. I think, however, if people read this article first, they might think twice about paying extra for this "secret sauce".

Christopher

The Triumph of the Random 

From banking to baseball, winning streaks owe much to the laws of chance

By LEONARD MLODINOW

It was the summer of 1945, and World War II had ended. Former soldiers, including famous baseball  stars, streamed back into America and into American life. Yankee slugger Joe DiMaggio was trying to be Yankee fan Joe DiMaggio, sneaking into a mezzanine seat with his 4-year-old son, Joe Jr., before rejoining his team. A fan noticed him, then another. Soon throughout the stadium people were chanting “Joe, Joe, Joe DiMaggio!” DiMaggio, moved, gazed down to see if his son had noticed the tribute. He had. “See, Daddy,” said the little DiMaggio, “everybody knows me!” 

Read the full Wall Street Journal article "The Triumph of the Random" »

A Big Step in the Right Direction

This isn't law yet, but it has overwhelmingly passed a vote in an influential House committee.  If this bill passes, and is signed into law, it will restrict 401(k) advice to independent advisers, taking away the ability of commissioned brokers from charging high fees in these plans.  The high fees has long been one of our criticisms of many 401(k) plans.  Unfortunately, they are pitched to employers as plans that will not cost the employer any administrative fees.  Of course, the revenue is then collected from the high cost investment options given to the employees.

To quote the last line of the article, "it's about time that Wall Street stop viewing workers' 401(k) accounts like a gold deposit to mine."

This brings the working/investing public one step closer to having freedom and independence in how their 401(k) assets are invested.  Currently, most plans have a limited set of mutual funds for plan participants to choose from.  In most cases, the investment selection is limited to inadequate due to a number of reasons:

1. The funds offered have high expenses.  Whether this is due to broker related commissions or the high cost of active management varies.  In many cases, it may be both.
2. The breadth of funds is not complete to construct a well diversified portfolio, especially in the small cap, international, international small and emerging markets.
3. The fund choices usually consist of actively managed funds.  There is considerable academic evidence that active management does not add value over a passively managed portfolio, especially over the long term.

We applaude companies such as Northrop Grumman, which offers employees the option to invest their 401(k) assets independently through the Schwab Personal Choice Retirement Account (PCRA).  This option effectively turns the employee's 401(k) assets into a self-directed brokerage account.  Employees may invest in stocks, bonds, no-load mutual funds or hire an independent Investment Adviser to assist them with the investment of these assets.

Here's the complete story in the Investment News:  "House committee approves bill that restricts 401(k) advice to indie advisers"

Not That This is News ...

to our readers and clients but...

Christopher

Active Managers Get the Cold Shoulder

By CRAIG KARMIN

A growing number of big investors are concluding that stock and bond pickers failed to add any value during the market turmoil and are shifting to index funds, a move that threatens to cut profits for asset managers.

"Active managers have not given us the added performance in a down market that we hoped for," says Bill Atwood, executive director of the $9 billion Illinois State Board of Investment. Disappointing returns by some large- and small-stock managers led his fund to move about $400 million to index funds.

Read the full Wall Street Journal article "Active Managers Get the Cold Shoulder" »

More Hedge Fund Trickeration

I thought this was hilarious. Here a guy named Mark Spitznagel is lauded as a genius who bet correctly that the market would tank last year. Of course in any outcome with a 50% probability (Market goes up, or down a lot) you'll have some good guessers.

So now, his new genius hedge fund is going to bet that there's going to be lots of inflation. WOW! What an insight. There's even a 50% chance he's right. Are people really going to pay this guy hundreds of millions of dollars to make this bet? Message to his investors, "I personally stand ready to make the same bet for half the price he is charging you." Think anyone will take me up on the offer?

Christopher

• JUNE 17, 2009

Black Swan Trader Bets Reputation on Inflation

By SCOTT PATTERSON

Mark Spitznagel made a fortune predicting the "black swan" that hit markets last year. Now the relatively unknown hedge-fund manager is emerging from the shadow of his collaborator, Nassim Nicholas Taleb, with a big bet inflation will soar.

The 38-year old Mr. Spitznagel managed the Black Swan funds to triple digit returns last year with a bet on volatility. The returns have brought a flood of cash, sending assets for his firm, Universa Investments LP, rising to $6 billion from $300 million.

Read the full Wall Street Journal article "Black Swan Trader Bets Reputation on Inflation" »

Federal Spending...

I'm going to let this graphic stand on its own. If you think this might be a problem for our well being and that of our children, contact your elected representatives and let them know what you think.

Christopher

 

Read the full Wall Street Journal article "Federal Intervention Pits 'Gets' vs. 'Get-Nots' " »

Interesting Comments from DFA Founder Booth

This is a nice, simple, brief (5 min) video explanation of the challenges of investing successfully for the long term. It turns out that the ideal investment allocation depends on how you define and view the risks we face as we age.

Christopher

June 2009

Retirement, Risk, and Return

David G. Booth, Chief Executive Officer, Dimensional Fund Advisors

San Diego Real Estate...

This is an interesting post from San Diego real estate's top blogger Jim Klinge.

Christopher

San Diego “21% Undervalued”

An excerpt:

San Diego County used to be one of the nation’s most overpriced real estate markets, as much as 40 percent above historic norms, according to the IHS Global Insight financial analysis company.

Yesterday, in a dramatic turnaround, Global Insight said housing prices in San Diego are 21.2 percent undervalued.

“It’s definitely coming back from the boom,” said Global Insight economist Jeannine Cataldi. The median price for a single-family home was $327,300 in the first quarter, the company said. Based on historic trends for household income, affordability and appreciation, the “normal” value should have been $415,300. That contrasts with the peak of the boom market, in the third quarter of 2005, when Global Insight found the median price of $506,500 was above the norm by $144,100, or 40 percent.

Continue reading "San Diego 21% Overvalued" »

History Does Repeat Itself

Back in December of 2008, I wrote a paper titled, “Investing for the Rebound.”  The paper is scheduled to be published by the Journal of Financial Planning, sometime this summer.  Unfortunately, for most readers, it will be too late by then.

One of the key points of the paper is that following every major market crash (defined as a 12 month period with losses in the S&P 500 Index of 30% or more) small cap stocks1 lead the recovery by a substantial margin.  In all of the periods observed, small cap stocks had recovered the losses of the S&P 500 within three years of the market bottom.  Some of the missing data points in the paper were the Non-US developed markets and emerging markets.  The recovery from this crash gives us an opportunity to see how those asset classes respond.

As of today, the bottom of this major market crash was March 8th, 2009.  The chart below shows the Quarter to Date and Year to Date returns, as of May 29th, 2009, for a select group of Dimensional Fund Advisors (DFA) mutual funds.  As I have indicated in other posts, I believe that the DFA funds are the best, real life, representation of the major equity assets classes as defined by the Fama-French research.  In looking at past performance it is telling us what has happened; past performance is no indication of future returns.  What past performance does allow us to do is test academic theories and principles.

 

As you can see from the chart, smaller stocks, around the globe, are having better returns than the large cap stocks.  Granted, this is an extremely short period of time.  Additionally, we do not know if we are actually in the recovery or not.  However, these results are consistent with the historical observations and what is expected based on the academic theories.

¹  Small Cap Stocks are defined by the Fama-French Three Factor Model.  It is the bottom 9th and 10th deciles of the market based on each company’s market capitalization.  The Russell 2000 does not meet our standards of a true small cap definition.  The Russell 2000 is the smallest 2,000 out of the largest 3,000 U.S. companies.

Warning! Absurdly Funny Take on Outsourcing...

If you want a good chuckle check out this video from The Onion.

Christopher

More American Workers Outsourcing Own Jobs Overseas

John Bogle of Vanguard...Listen

I have very little to add to his comments. Mr. Bogle is a credit to investment advisors. Just take a few minutes and read what this honorable man has to say.

Christopher

John Bogle and the Lantern on the Stern

By Robert Huebscher
June 2, 2009

Don’t be surprised if Vanguard founder and index fund pioneer Jack Bogle is not invited to next year’s Morningstar Advisor conference.  Bogle had very few positive things to say about the mutual fund industry – the industry from which Morningstar derives the bulk of its revenues.

Continue reading "John Bogle and the Lantern on the Stern" »