At the end of a slightly-punchy day, I looked at Morningstar's report on YTD returns. The top 12 funds have earned between 28 - 66% YTD. Eleven of the 12 are some flavor of Japan (3) or biotech/health
. The remaining one is leveraged short on gold. Six of the 12 appear to be leveraged.
The top unleveraged, diversified performer? You might think it's GMO Flexible Equities III (GFEFX), but apparently that's a covert Japan fund. No, with a slight shudder I note that it's Legg Mason Capital Opportunity (LMOPX), a one-star fund that represents Bill Miller's last stand. 98th percentile over the past decade and it's still got $1.2 billion in AUM.
David
Comments
In most instances I admire and respect your excellent analyses and writings. They are incisive with purpose and actionable meaning for us individual investors.
Given that record, I am greatly baffled by this submittal. Its purpose totally escapes me.
At best, it seems to be the product of hollow and random mind wandering. At worst, it is a carbon copy of those senseless financial and money magazine stories that tout “The 10 best Funds to Guarantee your Portfolio’s Growth”. I know that was not your intent, but the posting smacked from those misguided and mischievous magazine-like articles.
My first-order reaction to the piece was “so what”. What can an active MFO participant extract from the listing to bolster his portfolio? My simple answer is “nothing”. The 10 short term winners in this quarter’s sweep stakes will assuredly be replaced by another equally undistinguished group next quarter. The list just might help gamblers who speculate, but will not aid portfolio construction for the true equity investor.
Your piece lacked balance. Since you identified the 10 best short-term performers and their coupled unseemly returns, it would have been fair to identify the 10 worst performing funds. The downside losses from the bottom rankings are just as startling from these miserable managers. They roughly equal the upside rewards that you referenced in a negative sense.
As you noted, the positive outsized results largely reflect the leveraged design of the fund’s investment policy plus some hot sectors. This highly leveraging tactic almost always propels its proponents to either the top of the rankings or submerges them to the bottom of the heap. And it changes rapidly as does the hot sector becoming icy cold.
I was somewhat dissatisfied that you did not comment on the size of the referenced funds. For the most part these funds are miniscule in size. They are not representative of what the investing population owns or where their net wealth is nested. Size matters. The largest mutual funds have orders of magnitude more investors and more resources; they impact and influence the markets overall direction.
Also, why emphasize this very short time horizon? A more useful set of data would characterize “best” returns for longer test periods; a 5-year record will capture some elements of various market and economic cycles, and will more accurately measure the skill set of an active management. These longer term summary data are readily accessible and more properly symbolize realistic market rewards for the prudent average investor.
The funds that you referenced are likely owned by short-term market speculators, not by the more staid cohort that populates the MFO forum. I doubt if many MFO members would consider investing in a fund that deploys a leverage factor of three. The risk and the price perturbation discomfort levels are just too high.
David, you overwhelmingly generate outstanding analysis and stimulating text; however, this is not one of those illustrious instances. Sorry, but all MFO members should not just be automatic admirers of your work (although we often are); critical exceptions infrequently happen. Pure sycophants do not advance a more informed market understanding.
Please continue your superior fund research and your informative reporting. A uniform work product is a non-achievable target goal. You typically do not miss by much. This is a rare misfire.
Best Wishes.
Not to borrow another song title, but I have a mental category called "Things that Make Me Go Hmmm." Automotive engineers have returned to the old practice of designing car doors to make a resonant sound when they're slammed. Hmmm. Sequoia holds 44 stocks now including 10 new names in about a year; in the glory years, it tended to stay at 20. Hmmm. Morningstar's data has gone haywire at least three times in three weeks - it had Apple stock at over $4000, it showed the market undervalued by almost 40% on a Friday and overvalued by 32% on the following Monday. The overvaluation spike has been cleaned from the data, the undervaluation remains. Hmmm. Global temperatures have - against the predictions of virtually all models - plateaued, essentially unchanged for 15 years while greenhouse gas emissions climb. Hmmm. A pretty fierce run in the market was paced by two odd, unrelated sectors. Hmmm.
Like it or not: that's all there was to it. I was scanning datasets at the end of a long day, noticed a curious pattern, went "hmmm" and posted a quick note about it.
I subsequently discovered that placing a "8" inside parentheses creates an owl-like emoticon:
David
Thanks for replying to my overly critical posting. I hesitated to originally post, but it’s important to report that even the king sometimes does not appear fully clothed.
I understand that your “Hmmms” listing is a device to defuse any tension (none really exists), but I am not perplexed over your cited examples. I find them not enigmatic by any standard. They all are in my wheelhouse of comprehension.
Auto engineers never abandoned their goal to have solid door slamming sounds; it sells cars. More recently tighter dimensional and quality control simply amplifies their ability to deliver the goods.
Sequoia mutual fund indeed recently expanded (like in the late 2000s) its traditional holdings from about 20 to just north of 40. That’s a natural outgrowth from the passing of Bill Ruane (a Benjamin Graham student), and a late recognition that a highly concentrated portfolio of only 20 holdings does not provide adequate diversification protection against a market downturn. For example, Sequoia recently decreased its holding in Berkshire Hathaway from a huge 30 % position to a more modest 10 % position.
Although I will never condone errors, I can easily understand that Morningstar made at least three serious errors in their databases over a three year period. I am somewhat surprised that errors are not more commonly identified for such a high profile investor service. In a sense this error rate speaks volumes for their quality control given the immense number of data assembled each and every day. In its earlier days, I was singularly unimpressed by Morningstar’s documented policy to hire English majors for their writing skills over market analysts and statisticians for their numerical prowess.
The fact that global climate change models have generated poor predictions for their entire history is not in any way surprising to those who are familiar with analytical modeling simplifications. Models are NOT reality; they are simply models of very complex interactions that can not be resolved purely theoretically. These models often omit or misrepresent critical feedback loops that induce false projections. Such is the case with all global forecasting models. They are incomplete. In early versions they did not include dominating cloud and water vapor effects. Note how the predictions have become more subdued lately as more elements are incorporated. It is a mistake to assert that the scientific community was entirely in agreement with these projections. That was never true; a body of solid climatology scientists always took exception to the modeling itself and especially to the claim of universal agreement.
The observation that a group of market specialists do well for a short period is a self-evident observation. Someone or group must always top the winners listing just as someone else must occupy the bottom position. That’s an expected outcome from any ranking operation. The periodic performance tables that proliferate each year in the investing literature fully document the fleeting nature of such rankings. These studies always produce checkerboard-like patterns as a function of time.
As you can see, what are hmmms to you are not hmmms for me. The events that you cited are logical and explainable happenings for me. Given each of our limited resources, we each explore, study and understand different phenomena. I’m certain that I can elicit a bunch of hmmms that excite no wonder or mystery on your part.
I probably have already exceeded my welcome so I’ll end immediately and forever on this topic.
Best Wishes.
Thanks- OJ
What I'm trying to say is that sometimes people just have small talk, even about finance.
In what I took to be the same whimsical spirit in which David posted, I peeked at Morningstar's investor returns for LMOPX.
I blinked several times when I saw that the 5 year annualized investor returns are -10.22%, as compared to the slight depletion one might think was implied by the 5 year annualized total returns of - 0.66%. One could not ask for a better illustration of the way volatile returns can shake investors off the roller-coaster at inopportune moments.
I, too, am astonished at the still faithful $1.2 billion AUM. Yet I just looked and saw that CGMFX has an even more faithful $1.5 billion AUM. Maybe those assets belong to investors who have been in these funds for a very very long time...?
gfb
BTW: Don't underestimate the importance of appearing human (the opposite of robotic). It's possible such a failing cost at least two otherwise highly qualified candidates the Presidency over the past 15 years.
Cheers.
gfb
As the founding father of MFO, and by his marvelous monthly letters, David Snowball is, whether he likes it or not, the discussion leader for this forum. He sets the tone, the discipline, and the civility of the member exchanges. Also, as a de factor group leader, his opinions carry the extra influence of being accepted investment wisdom, especially from neophyte investors. That’s an awesome burden that he typically handles with considerable aplomb.
I’m sure he does not seek that elite status, but it often just comes with the territory by default. Every crowd (group, mob) either knowingly or unwittingly chooses a leader. But this elevated position does not come without added constraints. He must choose his commentary, his endorsements, and his specific word selection much more carefully than the generic member of the MFO crowd.
Often the crowd accepts the easy pathway and adopts the leaders suggestions without seriously challenging its pros and cons. For the lazy, inept, or rookie investor, it is much easier to follow someone else’s analysis and interpretations than to generate his own assessments. Daniel Kahneman called these folks “humans” from a psychological perspective. These folks constitute a major fraction of the investment population. They are intuitive, and make fast decisions.
The smaller fraction of this dichotomous world is populated by “Econs” according to the distinctions formalized by Behavioral scientist Richard Thaler. The members of this sub-group are more analytic, more rational, and slower in their decision making process.
I’ve always believed that the Econ class are ultimately better leaders and more successful investors in the long run. I place Davis Snowball in that category. He is both visionary and practical. David owns both these attributes in large measure. But that does not automatically mean that he will always be on-target. Leaders should never be awarded a free pass. Decision mistakes happen. Within a crowd, some level of skepticism is a necessary and rewarding attribute for crowd survival. Hitler was a dreadful leader.
A leader must always guard against gratuitous comments. They might well be improperly interpreted as precise advice to be immediately implemented, especially by the “human” segment of the crowd. The general crowd is not limited to such a communication control. They influence very few and are consequently free to ruminate on whatever subject captures their instant attention.
I’m sorry, but because of his leadership role, David does not have the freedom to ramble on any topic. Such ramblings invite misinterpretation and faulty investment decisions. A higher standard exists for the boss.
Here is a perceptive quote from motivational speaker Jim Rohn: “The challenge of leadership is to be strong, but not rude; be kind, but not weak; be bold, but not bully; be thoughtful, but not lazy; be humble, but not timid; be proud, but not arrogant; have humor, BUT WITHOUT FOLLY.” The emphasis is mine. David possesses all these exemplary qualities.
It was my definition of this higher leadership standard that prompted me to be critical of David’s original musing. If you or I did such musings no harm would be done; few would react to our sometimes inane commentary. That is not necessarily the case when Professor Snowball speaks. He speaks from a position of authority.
This distinction between the leadership (David) and the general membership (the rest of us) in any crowd is critical. When not properly addressed it can produce a group-think atmosphere that can do extensive damage.
I hope this additional posting more clearly defines my motivation and position on this matter. It is really of minuet consequence, if any. I felt compelled to violate my self-imposed last submittal plan because of the numerous additional postings, some of which completely missed my primary original purpose.
I hold no grudges or ill-feelings against David Snowball or against anyone else on this fine MFO Board.
I apologize to those who were truly offended by my observations; I do not apologize to those who posted inappropriate non sequiturs that did not advance this exchange whatsoever.
Best Wishes.
Many thanks for the heads-up. Of course, I meant "civility", and have corrected my post accordingly.
My Dad often cautioned that if you don't make a few mistakes, you're not working fast enough.
Best Wishes.
I got this from Yahoo Answers. Thank you very much. I learn something new every day here (: (: (:
And you, of course, have appointed yourself the judge of what is "inappropriate". You seem to be completely oblivious to the fact that not one poster here, including David, appreciates your self-important judgmental and haranguing tone of voice. You are surely entitled to your personal opinions, tedious though they may be. Your motto should be "never use a few words when a couple of chapters will do."
Hi Old Joe,
If nothing else, I can confidently rely on your criticism.
You are 100 percent correct in assuming that my remarks specifically referred to you and, perhaps a few other MFO Board members (not many).
Your disapproval consistently takes one singular form: It raises issues with my writing style and word selection, never with the principle investor educational goals that are its main purpose.
Your comments to me are terrific illustrations of the ancient idiom believed to be introduced in Cervantes' “Don Quixote”: The pot calling the kettle black.
The conventional understanding of that common saying is that a criticism a person is making of another could equally apply to himself. In this instance you serve as the offending Pot and I am your target Kettle.
The evidence for my analysis is immediately accessible in your response as follows: “And you, of course, have appointed yourself the judge of what is "inappropriate". You seem to be completely oblivious to the fact that not one poster here, including David, appreciates your self-important judgmental and haranguing tone of voice.”
So you find my judgment inappropriate, but your ad hoc judgment to be very acceptable. This is a great example of the pot-kettle-black equivalency. Thank you. I assume you conducted a careful survey of all responders to ascertain that “not one poster” deviates from your global assertion. You talk unmitigated and hostile nonsense.
I would also note your disingenuous omission of the coupled qualifier “inappropriate non sequiturs” in my original post. That omission harmfully distorts my viewpoint. Gratuitous, Ad hominem assertions should never be tolerated on this forum and should themselves be subject to harsh criticism. They should not stand unchallenged.
Differences of opinion should always be welcomed in the MFO forum. That’s the essence of the scientific method. My postings suffer from length because I try to provide definitions, explanations, anecdotal stories, data, and references to establish both interest and credibility to my submittals, especially important to establish a relationship with investment rookies. Given the depth of your postings, you are never confronted with those challenges.
I consider my investment philosophy and understanding to be very conventional and mainstream in context. It is conservative and cost conscious. It is a probability and statistically based approach. All this is pretty standard stuff. Your persistent and consistent opposition tells me a lot about your non-investment agenda, which in the long run might do harm to your end wealth. I would never wish you either ill-fortune or ill-health.
Your ranting attacks are okay by me since you continue to read and react to my postings, you are free to do so. I like it that way.
Best Wishes.
Hello again, MJG:
Thanks you for your thoughtfulness in clarifying and documenting the "pot-kettle-black equivalency". I (and no doubt most of the other board members) had always wondered what that meant, as it is a rather obscure quote and difficult to reason through. (Yes sir, that was sarcasm. It was occasioned by your typical condescending tone, which I understand is necessary to "establish a relationship" with we English-language rookies.)
I was unaware that commenting on an easily observed phenomenon is equivalent to an "ad hominem attack", and I thank you for clarifying that also.
"I would also note your disingenuous omission of the coupled qualifier “inappropriate non sequiturs” in my original post."
I am a little puzzled by this assertion, as a close read of your original post does not find this phrase in your original post. Whatever.
"I assume you conducted a careful survey of all responders to ascertain that “not one poster” deviates from your global assertion. You talk unmitigated and hostile nonsense."
Well there sir, as it so happens I did carefully read each and every other post in this thread, and if you can find one which agrees with either your observations or your tone of voice I would appreciate your pointing it out for me. "I would never wish you either ill-fortune or ill-health."
I'm not sure if there is a subtle insinuation here or not, but in any case it's fair to say that I feel the same way with respect to you.
"Your ranting attacks are okay by me since you continue to read and react to my postings, you are free to do so. I like it that way."
Seems you are capable of a pretty good rant yourself, as both your original post in this thread and your response to me clearly testify.
Best wishes to you, also.
Hi Old Joe,
Permit me to identify several errors in your response and/or direct you to the source of my statements.
In the opening line from your April 29 post to me, you yourself cited my “inappropriate non sequiturs” commentary. You are correct that it did not appear in my original posting, but that was not my reference.
Old Joe, I take issue with your interpretation of your survey. Those members who take the time and make the effort to post on this Board are NOT a representative sample of the MFO readership. In fact, they are a highly not representative cohort. Those who respond to newspaper editorials are not the average “Joe” (no disrespect intended). Averaging the letters-to-the-editor will not yield the general publics perception of an issue. It is not a meaningful statistic.
Also, you generalize far too broadly on the defense afforded David Snowball. If I had not formulated the criticism myself, I might well have joined the chorus rising voice in protest. David is a fine gentleman.
However, it is false to extrapolate from this singular group disagreement with my particular critique to the conclusion that “no one here appreciates your self-important judgmental and haranguing tone of voice”. Although I’m sure some folks would agree with your “opinion” on the matter, your so-called “survey” doesn’t permit that overly general conclusion. The folks you quoted disagreed with my assessment of David’s post, not with my overall writing style.
Lastly, I would propose that from a scientific, and even an investment perspective, consensus can be a very dangerous goal. Centuries ago, the consensus was that the earth was flat, and that the sun revolved around the earth. More recently slavery was an accepted practice. At the turn of the last century eugenics was a highly touted developing science. Thank goodness, these consensus concepts have pretty much disappeared.
Today, the global warming mafia has morphed into the climate change mob ignoring the fact that climate change has been a persistent driver for the earth’s entire history. Indeed, any consensus is a dodgy thing, especially in an investment environment.
A diversity in financial opinions is as healthful as is a diversified portfolio.
Best Wishes.