Stock exchanges are devouring each other because no one buys individual stocks anymore
In a bull market you’re not as smart as you think you are and in a bear market you’re not as dumb as you think you are.
Source: Bull Markets vs. Bear Markets
Our bottom line result is that perfect foresight has great returns, but gut-wrenching drawdowns. In other words, an active manager who was clairvoyant, and knew ahead of time exactly which stocks were going to be long-term winners and long-term losers, would likely get fired many times over if they were managing other people’s money.
Question: if God is omnipotent, could he create a hedge fund that was so good that he could never get fired? No. It turns out even God would most likely get fired as an active investor.
Liquidity in the biggest individual high-yield fixed income funds varies significantly from one portfolio to the next, according to an analysis by Fitch Ratings.
A great post on Jim Chanos of Kynikos Associates and how he views short selling versus being net long. The quote below from Charlie Munger mentioned in the article sums up the art of short selling and why most investors should steer clear of the investment strategy.
I’ve experienced the irrational exuberance of these type of promoters all too often when being short. Even being right on your thesis is not enough to be a successful short seller. Shortly after the 2007 iPhone launch, Palm announced that it would be coming out with a competing smartphone (the Pre) that was going to blow away the competitors. Backed by Elevation Partners the managing partner would go on TV every chance he could get to promote the coming phone and how great the sales were going to be. The stock rose until the eventual launch of the phone, once sales were seen as disappointing the stock began to drop, but Elevation engineered a sale to HP and managed to save their investment and make short sellers lives miserable.
“It’s dangerous to short stocks.” “Being short and seeing a promoter take the stock up is very irritating. It’s not worth it to have that much irritation in your life.” “It would be one of the most irritating experiences in the world to do a lot of work to uncover a fraud and then at have it go from X to 3X and at h the crooks happily partying with your money while you’re meeting margin calls. Why would you want to go within hailing distance of that? We don’t like trading agony for money.”
Great post by Josh Brown at The Reformed Broker about how listening to the market pundits can lead investors to abandon their investment plans to their detriment.
Let me wrap this up: 401(k) accounts are sacred, but they are not magic. They require a thoughtful person making decisions and behaving logically in order to work. The 401(k) users who have persevered through the large drawdowns of 15 and 7 years ago, while continuing to plug away with fresh contributions, are doing better than ever.
Source: The Farce Awakens
This type of trading now represents 70% of the volume – but it adds liquidity! (Yeah right)
That the firm took matters into its own hands shows how deeply the electronic bait-and-switch scheme has penetrated the global marketplace—and how slow regulators have been to root it out. The firm’s efforts, disclosed in a court filing in November, enabled Citadel to detect suspicious orders and, in a blink, pull back from trading.
One of the many seductions of dabbling in the stock market is the potential for lottery winners. Look at the returns these stocks have generated since going public:
Liquidity is a coward – It’s never there when you want it.
Recently I was listening to an interview with Jeff Gundlach, the CEO and CIO of Doubleline Capital, where he was talking about the liquidity of commercial mortgage backed securities (a type of bond that is backed by mortgages on commercial buildings) and he used that phrase to describe the market in those securities. Until you have actually been in a position that you can’t get out of at a reasonable price you would never understand how true that statement is. Unfortunately in the last week, many high yield bond investors and managers at Third Avenue Focused Credit Fund are finding out how price and liquidity can disappear just when you need it most. (Third Avenue Blocks Redemptions From Credit Fund Amid Losses)
I love clichés. The thing about clichés is that they wouldn’t be around and so heavily used if they weren’t true. In this case, there is a hard lesson to learn. One that can go without notice until you are right smack in the middle of it and wishing there was a way out.
Active investors still rule the market by a wide margin. Some would like to assume they’re just throwing darts in the dark, but in reality active investors are only getting smarter and better over time as more competition enters and technology progresses. As Michael Mauboussin has postulated in his work, the paradox of skill means that as more sophisticated investors have entered the marketplace the level of outperformance will continue to narrower over time. And as skill improves, luck becomes a much bigger factor in separating the winners from the losers.