Definitely A Challenging Time To Be An Investor

Yesterday I had an email exchange with someone in another part of the business and he concluded the thread by noting that it is “definitely a challenging time to be an investor.” There are challenges but of course that is always the case. The current set of challenges go back before New Century went bust. There were indications of trouble brewing in the US from early in the last decade. I certainly had no inkling of the magnitude of what was coming but markets and stats warned of some sort of trouble. From the equity market, the financial sector grew larger than 20% of the S&P 500 Index (this is less reliable in smaller foreign markets). Socially there were countless TV shows about house flipping. Stat-wise it was clear banks were taking on more risk, it was clear people were taking more risk buying multiple homes, no down payments, mortgage equity extractions and so on. Some of the behaviors were repeated from just a few years earlier. I remember a couple of different stock market TV series; I don’t remember the names of the shows but there was one on Fox with Giancarlo Esposito. Just as day trading and internet stocks became all encompassing social phenomena so too did house flipping and condo speculation. I don’t think this is the case with treasuries and gold but if you think it is the same then you should take some action. The challenges now are immense. It is far from an original thought to think that no one in charge knows what to do. To paraphrase someone; business don’t need more...

ETFs Are The Worst Idea Ever, No Wait They Are Mankind’s Savior

That title sort of sums up some of the current reading about how ETFs are bad versus the only things we should be using and of course both extremes are wrong. I have to say I am astounded that such bi-polarism still exists 17 years after the first US ETF started trading. From worst idea ever camp is this article from Chuck Jaffe and what I believe was the tipping point for the collapsing ETF theme that a reader was kind enough to link to. Jaffe’s article seemed to support both Bogle’s idea that they are bad because of the trading they allow (so not the actual product but human behavior) while conceding ETFs might be the better wrapper than traditional funds but he concluded with the suggestion to wait for five or ten years for the “revolution” to actually prove out. My first response to the collapsing ETF idea was no because in the now famous XRT example it would, IMO, be worthwhile for the fund provider to keep a popular and actively traded ETF seeded with capital if somehow there were to be a run. While I believe it would be worthwhile, folks like IndexUniverse did some sleuthing on the matter and the short answer is that creation/redemption process does not allow for the scenario that Bogan laid out in the original paper. Just because a collapse as described by Bogan appears to not be plausible some other sort of serious malfunction could be. Part of the case against ETFs stems from how they reacted during the flash crash. I think the narrowness of the argument is...

ETFs Are The Worst Idea Ever, No Wait They Are Mankind’s Savior

That title sort of sums up some of the current reading about how ETFs are bad versus the only things we should be using and of course both extremes are wrong. I have to say I am astounded that such bi-polarism still exists 17 years after the first US ETF started trading. From worst idea ever camp is this article from Chuck Jaffe and what I believe was the tipping point for the collapsing ETF theme that a reader was kind enough to link to. Jaffe’s article seemed to support both Bogle’s idea that they are bad because of the trading they allow (so not the actual product but human behavior) while conceding ETFs might be the better wrapper than traditional funds but he concluded with the suggestion to wait for five or ten years for the “revolution” to actually prove out. My first response to the collapsing ETF idea was no because in the now famous XRT example it would, IMO, be worthwhile for the fund provider to keep a popular and actively traded ETF seeded with capital if somehow there were to be a run. While I believe it would be worthwhile, folks like IndexUniverse did some sleuthing on the matter and the short answer is that creation/redemption process does not allow for the scenario that Bogan laid out in the original paper. Just because a collapse as described by Bogan appears to not be plausible some other sort of serious malfunction could be. Part of the case against ETFs stems from how they reacted during the flash crash. I think the narrowness of the argument is...

The Big Picture for the Week of September 26, 2010

James Picerno had an interesting post at his site the Capital Spectator. He explored the extent to which investors add value to their portfolios by managing betas, not by trying to add alpha–he even serves up a quote that theorizes “that there are no alphas…only betas we know and betas we have yet to identify.” This is a little fuzzy to me frankly but beta is simply an exposure. Equities are a beta, commodities are a beta as is every asset class that might go into a reasonably diversified portfolio. So “managing betas” means that an investor is adding value by knowing when to underweight equities and overweight commodities and being correct about it (just an example not a forward looking statement). IMO an example of successfully managing betas could be someone taking defensive action in late 2007 by heeding the 2% rule (market averages a 2% decline three months in a row as evidence a bear market has begun). To the extent that a decision to reduce long exposure for whatever reason and doing so correctly is adding alpha by managing betas then I am on board with that part of it. As far as no alphas well first, I just disagree with that. But the next question to ask is whether or not stocks from other countries comprise a distinct asset class from domestic stocks. This can be in the eye of the beholder but I don’t think that Latin American stocks, for example, are a distinct asset class–it is a region not a different asset class. Again though, there can be more than one right answer....

The Big Picture for the Week of September 26, 2010

James Picerno had an interesting post at his site the Capital Spectator. He explored the extent to which investors add value to their portfolios by managing betas, not by trying to add alpha–he even serves up a quote that theorizes “that there are no alphas…only betas we know and betas we have yet to identify.” This is a little fuzzy to me frankly but beta is simply an exposure. Equities are a beta, commodities are a beta as is every asset class that might go into a reasonably diversified portfolio. So “managing betas” means that an investor is adding value by knowing when to underweight equities and overweight commodities and being correct about it (just an example not a forward looking statement). IMO an example of successfully managing betas could be someone taking defensive action in late 2007 by heeding the 2% rule (market averages a 2% decline three months in a row as evidence a bear market has begun). To the extent that a decision to reduce long exposure for whatever reason and doing so correctly is adding alpha by managing betas then I am on board with that part of it. As far as no alphas well first, I just disagree with that. But the next question to ask is whether or not stocks from other countries comprise a distinct asset class from domestic stocks. This can be in the eye of the beholder but I don’t think that Latin American stocks, for example, are a distinct asset class–it is a region not a different asset class. Again though, there can be more than one right answer....