Evaluating Managed Funds

[Evan]

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The bond market is pretty efficient. The bond traders really do analyze a company and sell the bonds that have a high probability of defaulting. GM bonds are rated at BB or somewhere around there, and are not investment grade anymore... GM has some probability of defaulting on some of their bonds. But US treasury bonds still trade at AAA. If there was a 90% chance of default, they would probably be rated in the C's.

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I'm not making this stuff up. I gave you sources and pretty specific reasons. A chronic imbalance of trade cannot exist forever on the scale that it does today between nations. If you want to argue that then I'd suggest getting a job at the IMF.

The US runs about a 90% chance of having a technical default (that is not being able to make interest payments) and a 75% chance of actually going insovlent. These are all figures published by Robert Rubin, Kent Smetters and other far more notable economists than myself.

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Do you know there is a huge trade deficit between New Jersey and Texas? (I actually forget which way though! Doesn't really matter.) The consumers in New Jersey are importing an enormous amount of goods from Texas. It really can't continue!

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I hope this statement was a joke. If it wasn't that's too bad, if it was you shouldn't patronize people that are right.

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If the goods are cheaper to make and import from China, that's best for the world economy. It's best for us because we get lower prices. Capitalism works.

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You're right and oh so incomplete. It's almost as if you didn't read my post at all. THE CURENCIES NEED TO REVALUE. If the Yuan were permitted to float against the dollar it (the USD) would depreciate roughly 40%. That is unheard of. If this sort of thing happened in the financial markets instead of the currency markets, instead of being talked down it would probably be considered economic armageddon.

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The US economy is really, really strong and resilient. It is possible it won't be the strongest economy in the world in 50 years, but bankruptcy is not probable.

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Who are you and why should I believe this? Seriously, this is just an ignorant statement. The US saves at the lowest rate of any industrialized nation and currently at the lowest rate in history (~1%); meanwhile we are spending at increasing rates. This means we are spending out of our assets, and even worse, out of debt. Combine this with the fact that those joining the work force today will pay roughly twice the tax rate their parents did and it becomes a very ugly picture.


I don't have time to get into this further, but I'll end with a quote from Dr. Nile Ferguson (formerly a professor at Stern and now at Harvard) regarding the numbers I've talked about, "There is, however, one serious problem with these figures; not with the calculations that underly them, but with their acceptance [His italics]. To put it bluntly, the news is so bad scarcely anyone believes it." You're reaction is not uncommon, but that makes it no less wrong.


Edit to add one more quote from Paul Volcker, the man who was replaced by Alan Greenspan, "There is a 75% chance of a dollar crisis some time in the next five years." Again, Mr. Volcker should be at least somewhat more of a distinguished economist than me. That quote was not taken out of context at all. This problem is very real, even if the White House and the WSJ refuse to talk about it. Pick up a Financial Times or Economist and you will see for yourself.

[buffett]

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is there still positive alpha after evaluating on the 3-factor model?

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OK, I read the link you provided, and I found the 3-factor equation:

r - Rf = beta3 x ( Km - Rf ) + bs x SMB + bv x HML + alpha

I have a bachelor's in math from the Unviersity of Texas, a CFA designation, and an MBA from Wharton, and there's no way I'm going to try to solve this equation for alpha for the Superinvestors from Buffett's speech. If you can do it, please post the results here.

Perhaps I'm just a gullible slackjawed yokel or something, but I think Buffett's Superinvestors, Goldfarb's 10, Tilson's New Superinvestors, and some others that weren't mentioned in any of those lists (Olstein, Weitz, Dodge & Cox, Brandes, etc.) will beat the market over the long-term.

[buffett]

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Run it against IJJ for any time period and tell me why I should be convinced.

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Given your parameters (i.e., just comparing the charts), I can't. It's all about temperament, philosophy, and the flexibility to alter the size of the cash position.
This discussion reminds me of why I sometimes refer to it as the value investing "religion": smart people disagree about this stuff, and it basically boils down to whether or not you believe in it.

[BadBoyBenny]

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Edit to add one more quote from Paul Volcker, the man who was replaced by Alan Greenspan, "There is a 75% chance of a dollar crisis some time in the next five years." Again, Mr. Volcker should be at least somewhat more of a distinguished economist than me. That quote was not taken out of context at all. This problem is very real, even if the White House and the WSJ refuse to talk about it. Pick up a Financial Times or Economist and you will see for yourself.

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Don't forget, Warren Buffet also has much of Berkshire's cash reserves in currency plays against the dollar.

The fact is, the efficiency of the bond market is irrelevant, because the bond market is manipulated by asain countries trying to keep their currency low. It is possible this could go on indefiniely, but I think it is much more likely that the Chinese will eventually adopt consumerism and will no longer want to finance the trade imbalance.

[rockrock]

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is there still positive alpha after evaluating on the 3-factor model?

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The idea that Buffett and the rest of the SuperInvestors are crushing the markets solely because of their higher exposure to small caps and value stocks is kind of silly. You might get an extra 1-2% of annual outperformance that way, not 10-15%.


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1-2%?? What planet do you live on.

S&P vs small vs value

Small/value tilt pretty much paints the picture for anyone not otherwise altered by the SuperInvestor Frontal Lobotomy

[rockrock]

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Run it against IJJ for any time period and tell me why I should be convinced.

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Given your parameters (i.e., just comparing the charts), I can't. It's all about temperament, philosophy, and the flexibility to alter the size of the cash position.
This discussion reminds me of why I sometimes refer to it as the value investing "religion": smart people disagree about this stuff, and it basically boils down to whether or not you believe in it.

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I think it boils down to 1 + 2 = 3.

FAIRX hasn't outperformed Mid Cap value Index, period.

The ETF is also more tax efficient (look at those cap gains just paid for the Fairholme fund. UGGGGHHH) and has 0 management risk or risk the fund's objectives will change.

It is truly amazing how people refuse to believe that sell-side Wall Street is just that - a sales racket.

Also - this 4th quarter rally is a charade. It is a tale full of sound and fury, signifying nothing.

It's bonus time on Wall Street and they are driving the market up in order to secure year end windfalls in their paychecks.

Why is this never discuessed on CNBC? Its a all a big lie and actively managed mutual funds suck, end of discussion.

[Ed Miller]

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is there still positive alpha after evaluating on the 3-factor model?

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The idea that Buffett and the rest of the SuperInvestors are crushing the markets solely because of their higher exposure to small caps and value stocks is kind of silly. You might get an extra 1-2% of annual outperformance that way, not 10-15%.


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1-2%?? What planet do you live on.

S&P vs small vs value

Small/value tilt pretty much paints the picture for anyone not otherwise altered by the SuperInvestor Frontal Lobotomy

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So in the future you predict small cap/value stocks to outperform the S&P by how many percentage points annually?

[Ed Miller]

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It is truly amazing how people refuse to believe that sell-side Wall Street is just that - a sales racket.

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I believe this for sure. I've seen it for myself all too strikingly not to believe it.

[buffett]

Your IJR vs. SPY chart goes back all of 5 years. How about looking up the CAGR of the Russell 2000 vs. the S&P 500 for something more like 20 or 50 or more years and then getting back to us with your results?

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FAIRX hasn't outperformed Mid Cap value Index, period.

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Right. So far. And you're free to extrapolate that out into eternity, and I'm free to believe that FAIRX will eventually win.

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It is truly amazing how people refuse to believe that sell-side Wall Street is just that - a sales racket.

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I can't tell if you're still talking about FAIRX or not.

If you are, then I should point out that FAIRX is a buy-side firm.

If you're not and you're starting a new discussion point, then I totally agree with you. Jean-Marie Eveillard, a Superinvestor in my mind, says that on a good day he refers to Wall Street as a big promotional machine. On a bad day he calls it a den of thieves.

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It's bonus time on Wall Street and they are driving the market up in order to secure year end windfalls in their paychecks.

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Oh, my. You think their bonii are based on the stock market? I'll give you one more guess, and here's a hint: it starts with the letters M&A.

[buffett]

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The key characteristics that these investors have are great judgment and patience. A secondary characteristic is that most eschew running mutual funds, which are structured to sap performance. Those who do run mutual funds usually do so intelligently, i.e. they close before they get too big, which eliminates some of the handicaps.

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As usual, I think DC's posts in this thread are great stuff. Here's an anecdote Bill Miller tells about his early days in the mutual fund world (I lifted the text from the 05q3 report for the Tilson Mutual Funds):

When I was starting out in the business, I was pitching R.J. Reynolds [the Tilson Funds have no position in this security] as a buy to an account in Boston. RJR was a conglomerate then, 1983, trading at 4x earnings. My pitch was that it was really cheap and was going to go up a lot over the next couple of years. When I finished, the chief investment officer said, “That’s a really compelling case, but we can’t own that. You didn’t tell me why it’s going to outperform the market in the next nine months.” I said I didn’t know if it was going to do that or not, but that there was a very high probability that it would do well over the next three to five years. He said, “How long have you been in this business? There’s a lot of performance pressure in this business, and performing three to five years down the road doesn’t cut it. You won’t be in business then. Clients expect you perform right now.” So I said “Let me ask you, how’s your performance?” He said “It’s terrible, that’s why we’re under a lot of performance pressure.”