Do-Or-Die Time Nears for Old Investment Indicator -- Bloomberg

Chet Currier has some interesting thoughts on how much cash mutual fund managers have, and other old 'market indicators'.

Pretty nifty one-liner from the article: "Fund managers are good stock pickers but poor market timers". I love it. If most actively managed mutual funds fail in the longer run to keep up with their index benchmarks through stock-picking, then how bad would they be when attempting market timing?


Bloomberg.com: Opinion

The Correction has been Corrected!

So, if the market has made back the ground lost due to the "correction" -- I despise that word -- does that mean that the correction was incorrect? Mark Hulbert discusses it.



February-March correction now completely overcome - MarketWatch

And Trading Isn't Investing Either, Mr. Hoenig

Whenever someone can articulate a rational basis for thinking you can come out ahead by trading, other than wishful thinking, I'll consider it something more than gambling. Technical analysis? Not acceptable, not rational, as there is no objective research support whatsoever.Did you get that, technical analysis is not rational. Fundamental analysis? For short-term trading? Market noise overwhelms whatever merit there might be. In the slightly longer run? Twenty thousand other guys got in before you. You're in danger of being the patsy, the mark, at the poker table. Careful investors win, as markets always have moved up over time. Market returns are good, very good, and available. Some turtles run rather well, it seems.



Investing Isn't Gambling, Though Both Carry Risk (McDonald's) | SmartMoney.com

Very Interesting Bloomberg Piece on Dimensional Fund Advisors -- DFA

Not enough is written about DFA. "D" does not stand for "different", but it really could. Nobody else is quite like them. Their approach is quite intriguing. Nope, I'm not a DFA advisor. To this point.



Bloomberg.com: Exclusive

What do You Think of the Dow Theory? What do the Researchers Think?

For those who are into the Dow Theory version of technical analysis, Mark Hulbert at MarketWatch has a bit of a review, which I've linked to below, including the interesting note that the three Dow Theory newsletters do not agree on what it says about the present state of the market and the outlook. two are bullish, and the third is bearish. Now stop and think on that for a moment.

Hmmm. Academic researchers pretty much "busted" the Dow Theory decades and decades ago. Mark does refer to one Journal of Finance article all the way back in 1998 which argues for its validity. I don't know if anyone other than the authors was convinced! The Dow theory, like technical analysis generally, has pretty much been in the academic dumper for a generation now. When you test it, it consistently fails to succeed any more often than dart-throwing at the Wall Street Journal.

So, why do people cling to ideas after they are tried in the crucible of research and found to fail? Is it a matter of human nature? Of needing something on which to base decisions? Two things are definitely true. First, the folks who sell newsletters have a conflict of interest. They make a lot of money selling those newsletters. Second, Wall Street's brokerages like clients who trade a lot, be they big hedge funds or little guys investing on their own with newsletter in hand. They have a conflict also. Trading is money, commissions and/or spreads (discounts or premiums, technically,) on crossing transactions to them. Applying a technical analysis-based approach requires a lot of trading, generally. Being as gentle about this as possible, they are self-interested, and the consequences of conceding the failure of technical analysis would be somewhat difficult, particularly for the newsletter writers.

Also, what do you base investment decisions on, if this old, once-popular approach is not really any good? I have advocated in this blog a globally-diversified, multiple asset class approach, using indexed vehicles at least as the default choice. This approach has excellent research support. Well, you may ask, it this idea is so good, why isn't everybody doing it?

Mr. Roger Gibson wrote one of the most remarkable books on investing, primarily for financial advisors, Asset Allocation - Balancing Financial Risk. (3rd. ed., Mcgraw-Hill, 2000.) He writes of what he calls a "quadrant 4 worldview of investing", where the investor, after reviewing what is known about the realities of investing, concludes that neither market timing nor active security selection (stock-picking, for us,) will succeed over time in beating the market. The quadrant 4 worldview is in good accord with the consensus of a mountain of objective financial research. So he writes on the implications of a quadrant 4 view:

"First, a quadrant 4 worldview undercuts to a large degree the reason for the existence of the money management profession." It means that the billions and billions of dollars in fees and expenses investors pay to keep up the lifestyles of the cast of thousands employed in attempts to beat the market are largely wasted. Worse than wasted actually, as what you get for trying to beat the market these ways is that usually you do worse than the market, when all the costs are counted. So, who at your local wirehouse brokerage or online broker is going to tell you that!

They don't even typically talk about that to each other. What newsletter writer is going to want to face that, much less tell you?

The beauty of the "quadrant 4 worldview" is that it lets you, knowing the score, knowing the reality of risk, use market forces rather than fight them. it lets you invest in hope based on what is real! Market returns over time have been good enough to be really worth going after. And wouldn't you, when you think about it expect it to be that way when all is said and done?





What the Dow Theory has to say about current stock market - MarketWatch

More of Henry Blodget's book in Slate - He Calls Jim Cramer 'that Crazy Man'

I wrote a post about the first two parts of Henry Blodget's book excerpts at Slate. The third is up, and in it he devotes quite a few words to Jim Cramer and his show on CNBC, Mad Money. His stats on Cramer's stock picks are more current than I have previously encountered, and it's not pretty. A few thoughts first.

When Kudlow and Cramer was on CNBC I thought it was the best thing going. Those two counterbalanced each other nicely. I guess you could say that with their show the total was more than the sum of the parts. It's gone but not forgotten. I would say that Jim is jumping the proverbial shark nightly for CNBC, and they have not had much success otherwise with their evening programming. Now don't anyone tell him I said that, or he really will jump a shark on the show, and that could be the end.

A fellow I met some time ago would short Cramer's stock picks right as he made them in after-hours trading. He was not down on Cramer at all, but he believed that people were buying Cramer's picks willy-nilly as he made them without doing any personal research, and his thesis was that many of Cramer's picks went up, down, and then back up again. Thus the short sales. I have read Cramer's book Confessions of a Street Addict and really enjoyed it and learned a little bit about the mindset of a trader, that trading as they do it seems to be mostly about outgaming the other traders, not even remotely about investing, as Ben Graham defined it, or about fundamental or technical analysis. It was, in a word, surreal, and just not rational. One thing I will say about Jim Cramer is that he can really write. I think I would like him if I knew him personally, but that we would agree on very little.



Why you should never take Jim Cramer seriously. - By Henry Blodget - Slate Magazine

Marketwatch: John Prestbo's Commentary: Investors with diversified portfolios are market's real winners

Yes, yes. Mr. Prestbo gets it. He's talking controlling your overall portfolio volatility by blending asset classes, which implies patience. For every article on how to speculate on somebody's hot stocks of the month, or week, or day, or morning, there should be one like this on real investing.



Investors with diversified portfolios are market's real winners - MarketWatch

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Bloomberg's Article on Fidelity Contrafund & Some Thoughts

Updated to fix the link below!

Fidelity's Contrafund (FCNTX, closed to new investors) is a behemoth. At sixty-nine billion dollars, that's with a "b", under management, it is Fidelity's biggest fund, larger now than Magellan, and it trailed the S&P 500 by a noteworthy 4 percentage points last year. It's also significantly behind the S%P over the last ten years, as you can see above. That is a long enough time to mean something.

It has to be extremely problematic to manage such a fund without it just becoming in essence the proverbial "closet index fund", taking active management expenses for index fund performance. To their credit, the fund's managers evidently work hard to set themselves apart, and the fund is well regarded. In general, with such a fund, the manager must, to differentiate it from the index, make not just company picks, but industry or sector picks, or in some funds, perhaps even country picks. To significantly impact the fund's returns, you must put a monstrous amount of money into or out of a sector or industry, let alone a single company's stock. As I said above, Contrafund has worked well in the past, and it is successfully marketed as a choice in many 401(k) plans and variable products.

The key, the point of this post, really the ultimate question about such a huge fund (and it is a fair question, too) is whether the open-end actively-managed mutual fund model itself breaks down, performance-wise, with such a brontosaurus of a mutual fund. The whole idea of active management, to beat the market, when you grow so very large, can reasonably be questioned, even if someone is not a "hard core indexer". It isn't enough to point even at a record of beating a fund's index bogey, but the investor is owed something of a rational basis for the idea of how active management can work on such a scale over a significant time period. Perhaps it exists, I just haven't encountered it yet. Appealing to the supposed very large and highly-advanced brains of the fund managers (I'm quite willing to concede them that,) isn't enough either, when it is mostly having a hard time keeping up with the bogey.


Here's the article:

Bloomberg Exclusive