We Are All Active Managers

Snip20190320_82.pngWe have all heard the arguments about the flaws of active management and we all should have looked closely at the underlying data: active managers generally fail to beat their benchmark indices. Last year was the fourth-worst year for U.S. equity managers since 2001, as 69 percent of domestic equity funds lagged the S&P Composite 1500. Even more notably, as the period reviewed gets longer, overall performance gets worse. Over the fifteen-years through 2018, roughly 90 percent of all domestic and global equity and fixed income managers underperformed their respective benchmarks.

Institutional investors fare no better. On a risk-adjusted basis, 24 percent of funds fall significantly short of their chosen market benchmarks and have negative alpha, 75 percent of funds roughly match the market and have zero alpha, and well under one percent achieve superior results after costs — a number not significantly different from zero in a statistical sense.

Snip20190320_81Hedge funds – despite (and also because of) enormous fees – have badly underperformed too, and they are the most active of active managers. Indeed, if anything, their performance has been worst of all. Over the five years ended March 15, 2019, the HRFI Fund Weighted Composite has returned 2.81 percent, versus 11.03 percent for the S&P 500.

Meanwhile, and not surprisingly, assets are following performance. When it comes to mutual funds and exchange-traded funds that buy U.S. stocks, those that passively track indexes now hold 48 percent of assets. They’ll top 50 percent sometime this year if the current trend holds. Continue reading


How’s Your Bracket?

Lefty Gomez

Lefty Gomez: “I’d rather be lucky than good.” Source: The New York Times

Last month on CNBC, Warren Buffett announced his annual NCAA tournament bracket contest for Berkshire Hathaway employees. First prize is $1 million a year for life for any employee who picks a perfect Sweet 16 in the tourney. The odds of doing that are about one in 2-3.5 million, depending upon the year. Last year, none of the 17.3 million ESPN brackets had a perfect Sweet 16 and no Berkshire employee made it out of the first round (not Dayton’s “First Four”) alive.

NCAA basketball tournament bracket math isn’t an exact science. It is often said that the odds of picking a perfect NCAA tournament bracket are a staggering one in 9,223,372,036,854,775,808 (that’s 9.2 quintillion). That calculation assumes every game is a 50:50 proposition, which of course it isn’t (despite Virginia’s opening round loss to UMBC last year as a one seed).

According to Duke math professor Jonathan Mattingly, the average college basketball fan has a far better chance of achieving bracket perfection than that. According to Mattingly, adjusting probability based on seeding, the odds of picking all 65 games games correctly is actually more like one in 2.4 trillion. Using a different formula, DePaul mathematician Jay Bergen calculated the odds at one in 128 billion. Whatever the actual odds, if you are really lucky, your perfect bracket will last about halfway through Thursday’s games.

Whichever calculation you prefer, your odds of getting a perfect bracket are staggeringly small. For example, the following are much more likely than a perfect bracket. Continue reading

Getting Busy on the Proof


Source: Tom Gauld

On our best days, when wearing the right sort of spectacles, squinting and tilting our heads just so, we can be observant, efficient, loyal, focused, assertive truth-tellers. However, on many days, all too much of the time, we’re delusional, lazy, short-sighted, partisan, arrogant, easily distracted confabulators. It’s an unfortunate reality, but reality nonetheless.

And a remarkable number of us are downright crazy.

Behind the Curve, now available on Netflix, is a recent documentary about the surprisingly large community of people throughout the world who believe that the Earth is flat.*

As shown in the film, a true believer named Jeran Campanella devised a simple experiment designed to prove that the Earth is flat.

Much to Campanella’s surprise, his experiment proved the opposite of what he expected. His reaction was not even to question his preconceived notion, much less repudiate it. “Interesting. Interesting. That’s interesting,” is the best he could manage.

Nobody thinks they have joined a cult, as both research and real-world experience demonstrate.

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Worried Faces

io19.02Television producers love shots of nervous and worried fans during big sporting events. They convey the drama of the moment and the importance of the game to everyone watching. But I wasn’t expecting to see my daughter’s face in that context. That’s a screenshot of her on the right, with her husband, from the national broadcast of an MLB play-off game inn 2017.

Emily and her husband Josh are big baseball fans and have partial season tickets for the Washington Nationals. In 2017, the Nats were in the play-offs. My wife and I were home in San Diego, watching them on television in a tense match-up when we saw, over and over again, our daughter’s worried face on the screen. Our phones (and hers) lit up with texts from people who recognized her. Everyone who knew Emily, especially in a sports context, is familiar with “Emily worried face.”

She’s expressive and, well, she worries. Continue reading

Forecasting Follies 2018

The Philadelphia Eagles won the Super Bowl last January by defeating Bill Belichick, Tom Brady and the New England Patriots. They were coached by Doug Pederson, a remarkable young leader in just his second season as head coach, whose aggressive style and forward-thinking approach, driven by analytics, led the Eagles to their first Super Bowl championship ever. Pederson’s leadership style is epitomized by his daring fourth down goal line call just before halftime of the championship match-up.

Quarterback Nick Foles set up in shotgun formation and moved down the line of scrimmage to his right, talking to his linemen in hopes the defense wouldn’t be set when the ball was snapped. Running back Corey Clement took a direct snap, moved left, then flipped the ball to Trey Burton on a reverse. Rather than running the ball, Burton flipped a pass to an uncovered Foles, who had leaked out toward the end zone. Touchdown, Eagles. Foles became the first quarterback to throw and catch a touchdown in the Super Bowl, and Pederson’s reputation as an aggressive and successful play-caller became legendary.

Yet another fourth down conversion late in the fourth quarter kept a drive alive and allowed the Eagles to score what would become the game-winning touchdown.

Doug Pederson. Innovator. Super Bowl winner. Great coach.

Two years earlier, Doug Pederson was a punch line. Continue reading

Fear Not

When I was a ninth-grader, my high school showed Alfred Hitchcock’s classic horror film, Psycho, in the school auditorium on a snowy Friday night. I desperately wanted to be and look cool, but when Martin Balsam’s Detective Arbogast climbed the stairs in the old house behind Bates Motel to meet Mother, I dove under my seat in terror. Warning: The clip below is still scary.

We all face fear. We. All. Face. Fear. “Forty-five on the back of the jersey upon your soul.”

Investors have to face fear every day, although more so on some days than others (nobody complains about volatility to the upside), and don’t often face it very effectively. To quote Jason Zweig paraphrasing Mike Tyson, “investors always have a plan until the market punches them in the face.”

Real fear comes with names, faces, and a story. And oh how we want deliverance from our fears. Now that downside volatility is back with a vengeance, market commentaries are full of fear stories, since markets are driven by narratives much more than they are driven by data. As Morgan Housel has cautioned: “The business model of the majority of financial services companies relies on exploiting the fears, emotions, and lack of intelligence of customers. The worst part is that the majority of customers will never realize this.” Continue reading

Flirting with the Disinterested

Critics of the financial services industry frequently remind consumers that financial products are typically “sold” rather than “bought,” and implore them not to fall into that trap. The idea is that there is no enormous outcry on the part of consumers demanding to buy financial products. Instead, they are “sold,” pushed upon a consuming public that doesn’t understand them or – perhaps – even want or need them. Instead, the alleged basis for their continued vibrancy and ongoing usage is that financial advisors get paid big bucks to sell them.

Flirting with the Disinterested

It’s like flirting with the disinterested.

Sometimes those critics are right and consumers should remain disinterested. Indeed, it’s healthy for consumers to remember the interests of advisors they may be working with and – carefully! – to check their work and analysis. Far too many of them do not look out for their clients’ best interests.

However, the claim that because people don’t naturally flock to buy something on their own means that it’s dangerous and bad for you simply doesn’t hold up. People buy all kinds of terrible-for-you junk food in record amounts, while the fresh vegetable section of my supermarket is never crowded. Literary classics are a tough sell (Marilynne Robinson’s classic Pulitzer Prize-winning Gilead sold only 345,000 copies), while “popular” fiction sells exponentially more (The DaVinci Code sold 60 million copies), and porn is a multi-billion dollar business. Local symphonies are struggling to stay afloat while Justin Beiber could support several many times over.

What is good for you and things that have enduring or intrinsic value are sometimes a tough sell. But they are still good and good for you. Sometimes the stuff we want would be better avoided and the really good stuff needs to be sold. If you don’t believe me, maybe you will believe Steve Jobs.

“A lot of times, people don’t know what they want until you show it to them.”

Or how about the Nobel laureate, Daniel Kahneman? In one of the more influential papers of all-time, Kahneman and his colleague Amos Tversky developed “Prospect Theory” as a way to make sense of decision-making. The summary of the paper is, in short, that humans do not make optimal decisions, which normative (“should”) frameworks suggest.

All too often, we don’t do the things we should and do things we shouldn’t.

This doesn’t mean, of course, that businesses should not listen to their customers or that advisors should not listen to their clients. In the financial world, not listening to clients is a huge problem. Too much financial “advice” is about pitching what a salesman wants to sell rather than listening for and to a client’s dreams, aspirations, goals, circumstances and problems, and then going about creating a way to get where they want and/or need to go. Sometimes the best advice won’t be what the client wants to hear. Sometimes it will include an approach that the client had never considered. Sometimes it will need to be sold.

Ultimately, a financial advisor’s job is to provide clients what they need – not just what they want – even if they aren’t interested in it. There are plenty of supposed “advisors” who will erroneously sell their clients what they want and be richly compensated for it. Sometimes doing what’s best for clients – providing them with what they truly need – takes a great sales job (and that’s not a bad thing at all).

In a New York Minute

On Saturday I went to a terrific concert at Petco Park here in San Diego. It featured a 90 minute set from the latest iteration of the Doobie Brothers (who played their many hits), a 90 minute set from the Zan Brown Band (who, to my surprise, played a fair number of songs I recognized), and two and a half hours of the Eagles, invigorated by the inclusion of Deacon Frye and the amazing Vince Gill after the death of Deacon’s father, Glenn. From the Seven Bridges Road opening to the Desperado final encore, they were interested, the music was sharp and the harmonies were tight.

My only disappointment was that this time they didn’t play Don Henley’s wonderful New York Minute.

In a New York minute
Everything can change
In a New York minute
Things can get pretty strange
In a New York minute
Everything can change
In a New York minute

“Everything can change in a New York minute” no matter how good things are right now. And, today, the overall economic picture for the U.S. seems very bright indeed, at least generally (and despite our fractured politics).

Both stocks and underlying economic fundamentals are looking pretty good. Multiple stock indexes are at or near record highs. The total net worth of U.S. households have risen farther into record territory, propelled by climbing home values and stock prices. New claims for jobless benefits hit a fresh half-century low. Most see this week’s (expected) increase in interest rates from the Federal Reserve as a testament to the strength of the economy. Accelerating economic growth has been a key factor in helping investors look past the trade sparring between the U.S., China and others. Most expect the stock-market rally to keep going. Unemployment remains under four percent while minority employment is at all-time highs. Inflation is modest.

Things are doing pretty well in the financial world, at least in the aggregate. Continue reading

Dear Future Me

Bob Dylan hit on a universal truth when he sang about his son and the attraction of remaining young.

May your hands always be busy
May your feet always be swift
May you have a strong foundation
When the winds of changes shift
May your heart always be joyful
May your song always be sung
May you stay forever young

Dylan’s voice was best described, famously by Joyce Carol Oates, as if sandpaper could sing. But he was, according to Time magazine, “the guiding spirit of the counterculture” and the voice of his generation. Today that generation — my generation, the Baby Boomers, including Dylan — is no longer young. None of us is going to defeat Father Time, either. As Dylan’s friend John Mellencamp sang in Longest Days, “one day you get sick and you don’t get better.”

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Horrid Facts, Stubborn Facts

Note: This post is a much re-worked and expanded version of prior posts; here, for example.

September 11.

Two words. Powerful emotions. Searing memories. Evocative stories.

Exactly seventeen years ago, on Tuesday, September 11, 2001 and a little before 6:00 a.m., I was sitting in front of a Bloomberg terminal in downtown San Diego when the first, cryptic hints of trouble at the World Trade Center crawled across the bottom of my screens (I think). I had been scheduled to fly to New York on business the day before and had reservations for the week at the Marriott World Trade Center (3 WTC), which would be destroyed when the Twin Towers collapsed. Instead, I decided to stay home and go to “Back to School Night” at my kids’ school. As the day’s events unfolded, I recalled having been on the phone on the cavernous Merrill Lynch fixed income trading floor at the World Financial Center, connected to WTC by underground walkways, doing a STRIPS trade, when I heard and felt the February 26, 1993 World Trade Center bombing.

I was really glad I didn’t get on that plane to New York.

My little, not so evocative story is insignificant within the context of the tragic losses, horrible evil and incredible heroism of the “American epic” to which that day bore inexorable witness. But it is what happened to me. It was my story. It provides context and a framing device to help me remember and think about what transpired and what it means. It is emotional to think about still. But many other stories are far more important.

The image reproduced below is central to several other converging stories from that horrific day.


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