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August 8 - August 20, 2019
one of the questions I asked was: “What happens to our account if Goldman Sachs New York is destroyed by a terrorist nuclear bomb smuggled into New York Harbor?”
There is another kind of risk on Wall Street from which computers and formulas can’t protect you. That’s the danger of being swindled or defrauded.
There were a variety of risks, which we fully hedged, and several “kickers”—scenarios where we would make a higher—(often much higher) rate of return.
We were up 409 percent for the decade, annualizing at 17.7 percent before fees and 14.1 percent after fees.
Of the scores of indicators we systematically analyzed, several correlated strongly with past performance. Among them were earnings yield (annual earnings divided by price), dividend yield, book value divided by price, momentum, short interest (the number of shares of a company currently sold short), earnings surprise (an earnings announcement that is significantly and unexpectedly different from the analysts’ consensus), purchases and sales by company officers, directors, and large shareholders, and the ratio of total company sales to the market price of the company.
we created a trading system called MIDAS (multiple indicator diversified asset system)
described stock prices using a distribution of probabilities with the esoteric name lognormal. This did a good job of fitting historical price changes that ranged from small to rather large, but greatly underestimated the likelihood of very large changes. Financial models like the Black-Scholes formula for option prices were built using the lognormal.
portfolio insurance.
But this day was beyond anything our trader had ever seen or imagined. Gripped by fear, he seemed frozen. He refused to execute the trades.
We had no losing years or losing quarters.
If these legions of investors were easily gulled, often for decades, what does this swindle (and others) say about the academic theory that markets are “efficient,” with its claims that investors quickly and rationally incorporate all publicly available information into their selections?
cognitive dissonance. That’s where you want to believe something enough that you simply reject any information to the contrary.
I call the flip side to the wisdom of crowds the lunacy of lemmings.
Kovner was and is a generalist, who sees connections before others do.
Wouldn’t it be simpler and more satisfying for the seller to state his price and have the buyer take it or leave it?
Lesson: It doesn’t pay to push the other party to their absolute limit. A small extra gain is generally not worth the substantial risk the deal will break up.
Knowing when to haggle and when not to is valuable for traders.
What the hagglers and the traders do reminds me of the behavioral psychology distinction between two extremes on a continuum of types: satisficers and maximizers.
The optimal strategy is to wait until you have seen about 37 percent of the prospects, then choose the next one you see who is better than anybody among this first 37 percent that you passed over.
I learned that bigger stakes attracted bigger thieves.
The frauds, swindles, and hoaxes, a flood reported almost daily in the financial press, have continued unabated during the more than fifty years of my investment career.
the repeated exposés are not processed by the EMH true believer.
He then said that he believed that GOD knew that the stock market was efficient. He added that the closer one came to behavioral finance, the hotter one could feel the fires of Hell on one’s feet.”
Since the more the rest of us trade the more we as a group lose to the computers, here’s one more reason to buy and hold rather than trade, unless you have a big enough edge.
Offering explanations for insignificant price changes is a recurrent event in financial reporting.
To control risk, we limit the dollar value we hold in the stock of any one company.
the restricted list: Don’t initiate a new position and close out what we have.
Our entire holding of stocks, long and short, turns over about once every two weeks, or twenty-five times per year.
This is like card counting at blackjack again, but on a much larger scale.
Neither Jerry nor I believed the efficient market theory. I had overwhelming evidence of inefficiency from blackjack, from the history of Warren Buffett and friends, and from our daily success in Princeton Newport Partners.
We didn’t ask, Is the market efficient? but rather, In what ways and to what extent is the market inefficient? and How can we exploit this?
This was a ship for riding out cataclysms.
factor analysis.
Every stock market system with an edge is necessarily limited in the amount of money it can use and still produce extra returns.
Instead, I preferred to treat limited partners as I would wish to be treated in their place.
The most important reason to wind down the operation was that time was worth more to me than the extra money.
The “cigar butt” had become a humidor of Havanas.
As the economy slowly recovered and the market bounced back to new highs, investors forgot what happened to them in 2008–09. By 2015 hedge fund assets reached a new high of $2.9 trillion.
Winners tend to participate much more than losers. One study showed that this doubled the reported average annual return for funds as a group from an actual 6.3 percent during 1996–2014 to a supposed 12.6 percent.
As Shakespeare might advise, “The fault is not in our markets, but in ourselves…”
In 2013, among more than one hundred million US households, the number having a net worth of $1 million or more was estimated at between five and eight million.
You need to know enough to make a convincing, reasoned case for why your proposed investment is better than standard passive investments such as stock or bond index funds. Using this test, it is likely you will rarely find investments that qualify as superior to the indexes.
A class of people as smart as hedge fund managers can hardly be expected to overlook the advantages of deception.
With time, lucky managers tend to fade.
“Heads we win, tails you lose.”
on, the point being that hedge fund investors don’t have much protection and that the most important single thing to check before investing is the honesty, ethics, and character of the operators.
I declined because Meriwether had a history at Salomon of being a major risk taker and the partnership’s theorists were, I believed, lacking in “street smarts” and practical investment experience.
Warren Buffett says, “Only swing at the fat pitches.” This did not look to me like a fat pitch.
“Write down everything you spend. The waste in your daily spending should soon become apparent.”
Some of the superrich call $100 million a “unit” and, when they have their first unit, proudly announce that “the first unit is the hardest.”
