Friday Tidbits

First up is a comment or two on the current goings on in the market. The action of the past few days, and really for the month of October, has been a buying panic. This buying panic came after a selling panic in September. One of the two months (you can decide which one) is closer to what is appropriate given the total backdrop we are working in now. The bear case ties into the feeble housing and employment numbers combined with desperate action being taken by central banks in many corners of the world. The bull case ties into quite a few data points showing signs of improvements, some aspects of the earnings for the quarter looking good and a very impressive rally over the last four weeks. Take whatever side you prefer but I would point out that most of the time these types of monster moves do occur during bear markets. There is nothing that says this can’t be a bull market because it is possible that the worst is behind us, that we will never go below SPX 1200 again and that the market has turned up in advance of an economic turnaround. This is not my base case but it could be correct. We did not get as defensive as we did in 2008 but as I’ve been saying all along, on the way down you always wish you owned less and on the way up you always wish you owned more. Today would normally be the day that we begin to redeploy some cash but we recently switched custodians to a firm with...

Now That Would Be A Disclaimer

A reader left the following comment on the Seeking Alpha version of my post about the Fairholme Fund from the other day. I’d be more impressed if these Monday morning quarterbacks had been around warning investors during Berkowitz’s good times. But that would be the hard part, wouldn’t it? I left sort of a smart alecky comment in reply; Warning about what exactly? “Hey the manager might do a couple of really dumb things two years from now so you might want to avoid the fund.” I went on to mention that the type of blow up that has occurred this year at Fairholme can happen to any concentrated fund even if the backstory might be a little less sensational. This brings up an important investing dilemma that I believe exists and contributes to why so many people complain about 401k plans. Berkowitz was a master of the universe for a decent amount of time (some believe he will regain that status again). Unfortunately there is no way to know what an active manager will do in the future. You can know what the strategy is and hopefully likely to be but the exact trades are of course unknowable which makes the funds essentially impossible to analyze. With an actively managed portfolio you are expressing your belief in the strategy and that the past success can be repeated. You might draw the correct conclusion about a fund in that context but this is not really an analysis. Most 401k plans are a mix of index funds which are simply asset class exposure and actively managed funds which might correctly...

Now That Would Be A Disclaimer

A reader left the following comment on the Seeking Alpha version of my post about the Fairholme Fund from the other day. I’d be more impressed if these Monday morning quarterbacks had been around warning investors during Berkowitz’s good times. But that would be the hard part, wouldn’t it? I left sort of a smart alecky comment in reply; Warning about what exactly? “Hey the manager might do a couple of really dumb things two years from now so you might want to avoid the fund.” I went on to mention that the type of blow up that has occurred this year at Fairholme can happen to any concentrated fund even if the backstory might be a little less sensational. This brings up an important investing dilemma that I believe exists and contributes to why so many people complain about 401k plans. Berkowitz was a master of the universe for a decent amount of time (some believe he will regain that status again). Unfortunately there is no way to know what an active manager will do in the future. You can know what the strategy is and hopefully likely to be but the exact trades are of course unknowable which makes the funds essentially impossible to analyze. With an actively managed portfolio you are expressing your belief in the strategy and that the past success can be repeated. You might draw the correct conclusion about a fund in that context but this is not really an analysis. Most 401k plans are a mix of index funds which are simply asset class exposure and actively managed funds which might correctly...