Lessons Learned

2009-11-06T02:06:00.000-08:00

All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.

Arthur Schopenhauer (1788 - 1860)

Perhaps the least surprising thing the market crash of 2008/2009 was, was that no one saw it coming.

The establishment experts were all asleep at the wheel. Research analysts in Wall Street or the City of London were overwhelmingly bullish about just about everything. Buy Recommendations exceeded Sells by nearly 8 to 1. [This is not as big a deal as you might think -- the “official” experts are always bullish, but this was extreme]! Those few brave souls who sounded a negative tone were derided and then silenced. Now of course the ridiculous excessive of the years from 2003 to 2007 are obvious and the man on the street knows how we were taken for a ride.

The relevant question now for the trader or investor is what have we learned. To fail to learn from history is to be condemned to repeat it. I contend there are three lessons [ 3 blog posts?:]

1: Alleged market experts don’t know much. By the time their generic investing advice gets to the average client its worthless.
2: This worthless advice is extremely costly (typically some percentage of the assets under management, and/or commissions on trades and/or performance incentives and/or bid-offer spreads). Given that it has no worth any price is too much to pay. As Warren Buffet pointed out once these guys have their hands on your checkbook under-performance is guaranteed.
3: For decades apparently expert advisors were simply lucky. Their “ Buy and Hold” strategies succeeded by virtue of an underlying economic success which has (with hiccups) lasted since the ‘50s. A long-only random walk monkey would have done as well and cost less.

There is an alternative and we’ll be discussing it in my next post.

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Pat Brazel, CEO of Zignals.com. November 2009 has seen a significant upgrade with our new Beta MarketPlace and new rich internet application for finance, the Zignals Dashboard. Zignals now has new fundamental stock alerts, stock charts for Indian, Australian, Frankfurt and soon Canadian stocks, tabbed stock list watchlists, multi-currency portfolio manager, active fundamental system stock screener and trading system builder. New Forex and Index data.

Come back Glass Steagall all is forgiven!

2008-04-28T03:11:00.000-07:00

Q: What do we know, what do we really know?

A: Well we know that a 50lb poodle is a pretty big poodle

And we know that once the foxes get into the henhouse there is only one outcome.

So in all this talk about (lack of) risk management and due diligence and forethought, we shouldn’t lose sight of some pretty obvious lessons from history and the human condition.

It’s not so long ago that the merger/takeovers of the investment banks by the major financial centre commercial banks was hailed as the inevitable way forward. The story was that the only way that investment banks could play in the new world of M&A and prop trading was by having the massive balance sheets of the big retail players at their disposal [how right they were! (Unfortunately)] And so Citi ended up with Salomon and Schroders, UBS ended up with Dillon Read and SG Warburg, Barclays bought some crowd and were BZW for a while; Deutsche got Morgan Grenfell, Credit Suisse and First Boston shacked up too, etc. etc.

Ironically the only natural marriage that didn’t happen was JPMorgan and Morgan Stanley – the old House of Morgan (and perhaps the main catalyst of the Glass Steagall regulation) has not been reconstructed. Maybe they were smart or maybe the tribal memory saved them from the madness.

Thus the foxes got into the henhouse.

Traders with the instincts for the long term of a great white shark got their hands on an all-you-can-eat buffet of capital and gorged [don’t take my word for this see http://bigpicture.typepad.com/comments/2008/04/ubs-37b-write-d.html ]. These guys are coin operated risk-reward junkies -- your risk, their reward. In a microsecond they worked out that they had a call option on the assets of the firm. The maximising strategy was to gamble all the way to the high rollers table and then collaborate at that table to up the stakes. so that the pots just got bigger and bigger (using a variety of forms of leverage, misrated financial instruments and pass the parcel strategies).

Who should be surprised?

In the old days the risk takers played with their own capital and maybe that’s why they used to be quite good at it. Now they are crap. Management of other people’s money, (whether as bank capital or in hedge funds) has coincided with a period of disastrous returns to investors. Some of this is explained by the outrageous fees ( annual fees + 20% or more of the upside – what a deal! ) which wipe out returns (ask Warren Buffet -:http://money.cnn.com/2006/03/05/news/newsmakers/buffett_fortune/index.htm ) but most of it is explained by human nature and our response to incentives.

But here’s the thought -- the more they are paid the worse they will be!

Come back Glass Steagall all is forgiven.

Pat Brazel discusses topics around portfolio optimization, wealth management and investment strategies for Zignals

Zignals blog

Lessons Learned

Come back Glass Steagall all is forgiven!