Friday, September 14, 2007

WSJ: Goldman Hedge Fund Had Worst Month in August

"For years, Goldman Sachs Group Inc.'s flagship Global Alpha hedge fund could do no wrong. Over the past year, it has been able to do almost nothing right."

"August was the worst month in the fund's 12-year history; it was down 22.7% last month alone, according to a recent letter to investors. So far this year through the end of August, it was down 33.4% due to bad bets on everything from the Australian dollar, the Norwegian stock market and Japanese government bonds. The letter gave no indication about how the fund was faring this month. Over the past 12 months, the fund has lost 37% of its value."


For those who do not know the difference between speculation and investing, this sort of result may provide a useful opportunity for review, as they at least look more like an example of speculation than of investment, and of what happens when speculation goes awry. Money vaporizes, for one thing.

Speculation, per Investopedia, is "The process of selecting investments with higher risk in order to profit from an anticipated price movement." Further... "Speculation should not be considered purely a form of gambling, as speculators do make informed decision before choosing to acquire the additional risks. Additionally, speculation cannot be categorized as a traditional investment because the acquired risk is higher than average." And, reading on, "More sophisticated investors will also use a hedging strategy in combination with their speculative investment in order to limit potential losses."

I would go further, and say that there is not really even such a thing as a "speculative investment". It is sort of an oxymoronic usage. It is a speculation or it is an investment. And the reference to use of "hedging strategy in order to limit potential risks" is a bit ironic, as we're looking at a hedge fund, like many others, which has seem its efforts at risk control overwhelmed by market events.

"Investment", remarkably, is not defined in Investopedia! You might best define "investment" by a reading of chapter 1. of Benjamin Graham's classic work The Intelligent Investor.

I guess you might say the difference is indifference!

Relative indifference to risk, and greater willingness to accept more of it, are characteristic of the speculative, er, speculator. I said relative! Risk is always there, as even Graham would have admitted. There is such a thing as an aggressive investment, and an agressive investor, but the aggressive investor has tied his approach to his goals, and has pretty serious policy controls on the degree of acceptable volatility. A willingness to accept relatively greater levels of risk, with relatively poorer compensation for bearing that risk, or less knowledge of the actual risk taken, is associated with speculative commitments of money. In terms of equities, investors seek more compensation for bearing risk through such things as revenue streams (dividends) and lower prices for access to growth in earnings. A mere hope that the share price will go up or down based on expected short term developments is a speculative approach, for example. For example, using this view of the terms, just about everything I have ever seen Jim Cramer suggest is speculative, not investing.

Bottom line: In what sense is a commitment of money to a hedge fund an investment? If, as has already been said by someone other than me, the 'best and brightest' in the business cannot run a hedge fund without results like this, then who can?

(the story is $ subscription only)
Goldman Hedge Fund Had Worst Month in August -

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Wednesday, September 12, 2007

Retirement Funds Vanish as Bankruptcies Hit Tax-Deferred Scheme : Bloomberg's Erik Larson

The story is about an intermediary and some section 1031 exchanges gone very bad. Money not there. Now I'm neither a CPA nor a tax practitioner. From a very general investment and personal finance perspective, what are the lessons?

Businesses built around the tax code's loopholes can turn out to be very poor places to put your money. There must be a "valid business purpose" somewhere in there. I'm not just talking about such a business purpose for IRS purposes, but for investment purposes, such as "has this thing made money?" and "has it ever paid back the investors' principal?". When a very big tax loophole gets lobbied into existence, legitimate businesses will be built which also accommodate it, and then sometimes more exploitative types come in, for the big, quick bucks which might be hustled. No specific characterizations of such intended here, but generally, it should always be a concern if it is your money that is involved. When the tax consequences of a transaction, or a use of a specific intermediary look to you, as a lay person, to be the key drivers, rather than the making of a profit or gain, then, caveat emptor.

Another lesson, for business owners such as the person mentioned in the story, is to surround yourself with reputable people, to run something like the transaction described in the story by both your lawyer and accountant, and listen to them.

Seek real diversification, not just apparent diversification, when you can. If one thing goes very badly, will you be washed up?

Finally, if in a situation somewhat like the one in the story, if there is not a way to get the favorable tax outcome you would prefer, a way which passes the "smell" test, look for a fall-back approach, perhaps a less aggressive approach, with a still pretty good outcome. Beware people giving you a hard sell on some sure-fire tax-avoidance scheme, which just happens to compensate them handsomely. Ask how they are compensated! Demand specific written disclosure! The proposed actions might look like tax evasion, not tax avoidance, to the authorities. There's a world of difference. Even when the "intermediary" doesn't lose or steal your money. Exclusive

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Tuesday, September 11, 2007

Credibility of financial blogs is questionable: Investment News

via the estimable Fintag .Yes, again. Yeah, I know he has a hedge fund. I read some of their blogs too. I never said they weren't smart!

So, what good is a financial blog? Why should you read any blog? Why should you allow yourself to possibly be influenced by anything you encounter, like a blog, or the New York Times, or Fox News? If some blogger has a discernible axe to grind, you should indeed factor that in as you are reading or viewing. Is there a sales pitch in what you read, even a veiled sales pitch?

My own intent, sincerely stated, is to warn folks of investing or personal finance mistakes, and bad deals. Sure, I'd like more clients for my fee-only investment advisory business, but I develop my business in other ways than through this blog. This blog, like Fintag, is anonymous. Getting introspective here, could I or other bloggers have other motivations, possibly questionable ones, which might work to the detriment of the reader or a third party? In my own case, I really don't see any. First, my readership is small, but presumably reasonably sophisticated in its outlook on things. If I "cry out", so to speak, against generic problems with a type of investment product, or against a client-unfriendly business practice in the financial services industry, one pretty good test of what I say is whether it is propositionally true. I know that I am by no means the only investment adviser around who wishes to run the most exemplary little shop to be found. If I were to describe the most desirable sort of adviser-client practices I know of, with some explanations or support information, noting that I am by no means the only one operating this way, is that a sales pitch in some way?

If you read a story in what has come to be known as the "MSM", the mainstream media, and find it to include subtle (or not so subtle,) editorial coloring, shading, texturing, etc., do you discount that, never forgetting the source, as you read? You really should.

A test: Can you take such media as the Financial Times, The Economist, the Washington Post, the New York Times, and the Los Angeles Times, and the CBS News, et al, and conclude that there may be the same problem as the linked article alleges exists among bloggers?

Credibility of financial blogs is questionable - InvestmentNews


Friday, September 07, 2007

at an inflexion point in subprime crisis? Perhaps

Hat tip to Fintag on this one.

A couple of rather powerful thoughts: "...investors should be canny and careful, and take little for granted. My own strategy is to invest in sound assets and simply hold onto them. That’s because the other relevant phenomenon about crises, is the system ultimately recovers. If you have the staying power, you will probably do fine." This is how investing, real investing, is done. You establish an appropriate asset allocation for you, in full consideration of your own time horizon and ability to bear market risk. You stick to it. If you do not understand how to do this, you should study some, or you gird up your loins and go find yourself a trustworthy, competent adviser. He can.

A trustworthy adviser has an investment approach consistent with objective academic investment research, not Wall Street's age-old refrain: "We're sooo smart, we can out-research and out-invest and out-trade everyone else for you! It must be so. Just look at my nice watch and expensive office!"

Bruner: We are at an inflexion point in subprime crisis - General News - - The network for financial decision makers

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