Consistently Inconsistent

Posted on May 29, 2011

Yep. That’s the latest word about money managers trying to best their index & peers.

Financial Times:

F und managers are still failing to deliver any consistency in their investment performance, according to a new analysis of returns from more than a thousand funds – making it almost impossible for private investors to pick long-term winners.

Thames River Multi Capital (TRMC) has just produced its latest “consistency ratio”, which measures the proportion of funds in the 12 main fund sectors that have produced top quartile returns in each of the past three years.

This shows that only 16 out of the 1,188 funds in those sectors with a three-year track record – just 1.3% – have been in the top 25% for performance in three consecutive 12-month periods to the end of March 2011.

And yet, we still get ads like the one below (on the right).

Exhibit A:(name of the guilty redacted)

Now, don’t get me wrong. That ad isn’t criminal. The placement is maybe… (criminally funny).

The firm does actually have some great managers on their platform. And Thames findings do confirm that about 1% of the world’s investors can do well, consistently.

Exhibit B: click to embiggen

But most investors spend 99% of their time (and money) chasing the 1%. Chasing the hot dot. And then usually selling the hot dot at the bottom. (See: Exhibit B)

Silliness. Douchebaggery, if you will.

Me? I think chasing the Alpha Dog status for returns is fine. But I mostly advocate copying off of the super smart kids– The Buffett’s & Soros of the world. The Big Money. The movers. Or maybe with Blue Ridge or Greenlight. You know, the Einhorn’s of the world. The real players. Track their SEC filings. Meb Faber has a great synopsis on the discussion going on in that arena right now.

But for me, if all I have is $1 or 2 million liquid — I’d only have 10% of my money trying to just kill it. Maybe 20%. If I lose half {or more} at any given time, so be it. I’m young though. But I’m certainly not about to take half of my money or 90% of my money to do that. Ever. I’ve worked too hard for that money. But that’s just me. I never want to be that billionaire sweating bullets because I’m so leveraged.

To some degree that’s what you are doing though, when you invest in 99% of the active managers that are sold to you you’re advised to buy. Every single manager is trying to give better returns, or why not just invest in the index then? Right? And so, you’re taking your money & placing a bet on them, that they are going to do better than average — net of their risk, the fees, & of course, taxes. And they’re not. In fact, recent studies show 24% will add negative value. The other 75% will add no value.

Exhibit C:

Bill Gross is like the godfather of bonds to the retail brokerage salesforces of America. Right? In every office & kitchen table around the country, a broker points to the 5-stars from Morningstar, says the words “Bill Gross” & then the client smiles & says, sounds good to me. And why not?

Look at this chart. It’s his Total Return fund (blue). In one of the ‘easiest’ times to be in the credit markets (pre-2008), he was doing great. For five – almost six – years. Beating 7-10 year treasury bonds pretty consistently.

And now? In the long haul? He’s getting his ass handed to him. Since 2001– that’s 10 years folks. 7.28% vs. 16.48%. He’s underperforming by almost 10%. And like I said, that’s not to mention all of the fees & taxes you’ve paid. Or the fact, that the index costs about 30% less, every single year vs. Pimco.

And that’s bond money– you know the stuff that isn’t really supposed to be that crazy, hence the ‘total return’.

Look at the chart again. He killed, then 2008 happened. And look, he goes the opposite direction. That’s when everyone had the safety trade on, like captain obvious stuff. I guess he didn’t get the memo. And since 2010, his line looks like a watered down version of the index. He’s hugging the ropes now. The jury is still out I suppose. He might turn it around. But, that’s the hard part about being on point with the expectation of beating an index. It’s relentless. But if you do it right, it’s the lottery baby. KaChing.

I mean look, Bill Gross is a billionaire now.

So, I guess I shouldn’t be surprised that people keep chasing the dream. It’s probably one of our oddest mental quirks. You’ve seen it play out, probably at the Roulette table, or watching grandma play Keno. She plays 23. Always. When it doesn’t hit, she only gets more confident that she’s due. Sometimes, she’ll double down.

Of course, the odds are completely reset with each new session, so she isn’t really ever due anything — except living the dream.

It’s called the gambler’s fallacy.

Me? I don’t gamble. Kind of as a rule now.

I don’t even buy squares in the office pool — I’m a stick in the mud, I know.

When I was a kid, I would bet on everything, but rarely with money. I’d trade commodities, like 5 Michael Jackson stickers, or a super awesome pencil fighting pencil, maybe a haul to the mall as a teen. I was fearless. Bet me I can’t jump off the house into the pool? I’m in. Drink pepper, salt, and anything else at the coffeeshop counter with milk. You’d better have my five bucks.

Ok, in retrospect– I was mostly an idiot with bravado. So today I don’t bet. Not that you can eat 15 habernos in 90 seconds, or clean off an entire chicken wing bone in single all-encompassing bite. Or that either of us can outdrink the other.

My wise ole imaginary TV dad (who’s the amalgamation of: Mr. Keaton, Dr. Huxtable, Obewon Kenobi, and Al Bundy) always tells me the same thing; if someone is willing to bet you — chances are they know something you don’t.

…Or they’re an idiot. {bravado optional}

Either way. Life is enough of a gamble. 

And people get struck by that; my no gambling rule.

The scene plays out consistently enough. There’s the: double take, the “huh?” with just a hint of “smells like shit in here”, the snort, the yelling of “get the fsck out of here!” (my personal favorite), and of course, the always embarrassing chortle.

Almost all of these happen after one too many Zinfandels or fruit garnished beers. “But you’re a broker. How can you not gamble? The stock market is like legalized gambling, isn’t it?”

I’m pretty consistent with my answer lately…”Well, depends on what game you’re trying to play.”

And their response? Consistently inconsistent.


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