PlanMaestro
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Best Ideas
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1364827
Abstract:
We examine the performance of stocks that represent managers' "Best Ideas." We find that the stock that active managers display the most conviction towards ex-ante, outperforms the market, as well as the other stocks in those managers' portfolios, by approximately 1.6 to 2.1 percent per quarter depending on the benchmark employed. The results for managers' other high-conviction investments (e.g. top five stocks) are also strong. The other stocks managers hold do not exhibit significant outperformance. This leads us to two conclusions.
First, the U.S. stock market does not appear to be efficiently priced by our risk models, since even the typical active mutual fund manager is able to identify stocks that outperform by economically and statistically large amounts.
Second, consistent with the view of Berk and Green (2004), the organization of the money management industry appears to make it optimal for managers to introduce stocks into their portfolio that are not outperformers. We argue that investors would benefit if managers held more concentrated portfolios.
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One I thing I learned while working for an auto parts company: Kaizen.
http://en.wikipedia.org/wiki/Kaizen
There was a time when auto companies and their suppliers carried huge in-process inventories because they thought defects were statistical … when they weren't.
RR: Deming System, that is also relevant for the discussion on Finland's education system
http://en.wikipedia.org/wiki/W._Edwards_Deming#Deming_philosophy_synopsis
I think that everybody who is concerned about concentration should make this exercise:
- Assume that you own N stocks every year
- Assume that the returns for any of those stocks can be described by Gaussian distribution with average R and sigma dR
- Run 10, 20 and 40 yr simulations varying N and using your estimated values of R and dR.
Very few people will wish to systematically own 3 stocks after seeing the results.
Now, instead of a Gaussian, use a realistic, fat-tailed distribution which can certainly go to 0. You will see that it is very risky, as in permanent-loss-of-capital, to own only 3 stocks for decades. If it is only a short period of time, because you see an amazing opportunity, well above your average expected returns, then it may be worth the risk, but I would still do the numbers carefully.
Seth Klarman has averaged ~20% per year, is managing >23B, and it is still able to find 20-30 stocks to invest in. It should not be that hard for retail investors.
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One aspect that I'm missing a bit in this discussion a bit is that the amount of concentration should imo for a large part be a function of the idiosyncratic risk in a certain investment. You could have an awesome investment that still has a 50% probability of going to zero. Wouldn't make sense to put all your money in your best idea, if this is your best idea, no matter how big the upside. If you have on the other hand a super solid and safe business it might make sense to put a lot of money in it even though it's going to return a lot less on average than the business with binary outcomes.
Concentrated investing forces you the discipline of avoiding fliers, coin tosses, and lottery tickets. You really have to know what you are buying. It also self-regulates the amount of cash to have available for once-in-a-lifetime opportunities that seem to be appearing more than once in a lifetime.
I also like about concentrated investing, that there are always tempting but distracting cheap crappy leveraged companies available. But they involve too much psychic attention for my taste: too many surprises, and surprises are usually bad. That I learned the hard way following Klarman into RHI Entertainment (RHIE) a while back. Horrible.
Some catastrophic surprises that I avoided this year: PNCL, ATPG and LNET … and I have to say all of them were very, very tempting at the time.
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As 6.01 million, strike $33.70, expiration date of Dec. 31, 2018, DPS $0.54
http://www.sec.gov/Archives/edgar/data/750556/000119312511252839/d217887d424b7.htm
Bs 11.89 million, strike $44.15, expiration date of Nov. 14, 2018, DPS $0.54
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Anyone of the many insurance gurus here know CV star?
He is probably talking about CV Starr aka Hank Greenberg.
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4:07PM Hartford Financial completes execution milestone; closes on planned business sales; transactions to provide net statutory capital benefit of $2.2 bln (HIG)
The Hartford has completed the sales of three businesses, closing on agreements for the sale of Retirement Plans to Massachusetts Mutual Life Insurance Company and Individual Life to The Prudential Insurance Company of America, as well as its Individual Annuity new business capabilities to Forethought Financial Group, Inc. The company previously announced the completion of the sale of Woodbury Financial to AIG on Dec. 3, 2012. In aggregate,
The Hartford does not expect these transactions to have a material impact on GAAP net income. However, due to the timing of the transaction closings, the company expects a modest realized capital loss in fourth quarter 2012 and a modest gain in first quarter 2013.
The company will realize an estimated net statutory capital benefit from these transactions of approximately $2.2 billion, which is comprised of an increase in U.S. life statutory surplus and a reduction in the U.S. life risk-based capital requirements. This net statutory capital benefit is almost entirely associated with the sales of Retirement Plans and Individual Life, which closed on Jan. 1 and 2, 2013, respectively, and, as a result, will be realized in first quarter 2013 statutory financial results.
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Hedge fund industry loses out again
http://www.ft.com/intl/cms/s/0/3fa68bda-4b7f-11e2-887b-00144feab49a.html#axzz2Glh78llf
According to Hedge Fund Research, slight gains in December were likely to mean the average hedge fund manager made just more than 5 per cent over the year – a period watched closely by many investors after disappointing returns in 2011, when the average hedge fund lost 5 per cent.
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As with 2011, the eurozone crisis dominated most funds’ trading. Global macro funds, which aim to profit from shifts in economic sentiment, were among the hardest hit, entering a second year of losses for investors.
Some of the strategy’s most prominent players eked out low returns. Paul Tudor Jones’ flagship fund made just more than 5.2 per cent in the year to mid-December, according to an investor.
Brevan Howard, Europe’s largest macro hedge fund, made 3 per cent, while Caxton Associates, another prominent group, lost 3.4 per cent in the year to November.
Bearish managers fared worst, as the eurozone avoided a costly break-up even though it fell back into recession in 2012. Comac, a London-based macro hedge fund, was down 8.9 per cent for the year in mid-November.
So-called “tail risk” funds, which aim to profit in times of market dislocation, also suffered. The $2bn Capula tail risk fund, the world’s largest so-called “black swan” trader, had lost 14 per cent by November.
Other notable losses for the year included those of John Paulson, the hedge fund manager who made billions shorting US subprime mortgages in 2007. Mr Paulson’s flagship Advantage Plus fund lost more than 20 per cent in 2012, compounding losses of more than 50 per cent the previous year.
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Agree Vinod, but don't you find strange a level of hedge fund underperformance that is way more that could be justified by fees and transactions costs? And studies of retail investors buy high / sell low of mutual funds underperformance is in the hundreds of bps per year over the manager underperformance. Who is picking this performance, just hedge fund managers' 2/20?
None in aggregate and in the long run - notable subgroups who I think are the exception are proprietary traders with benefit of front running/insider trading and Grahamites.
Index investors get the market return, all others get market return less fund expenses (transaction costs, fund fees, taxes, etc). So the total return for all active investors must by definition be less than the market.
Vinod
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… with the exception of 2008 when both fell sharply.
If hedge funds underperform, mutual funds underperform, and retail investors underperform ... who performs?
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I'm still in phase one, we're still buying cigar butts, there's a good business in buying them and it's a lot of fun … I think Buffett's a better investor than me, because he has a better eye towards what makes a great business – Seth Klarman
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Me2, but I think a lot depends on what type of ideas you are looking for and your temperament. If you are a statistical Graham stock investor, you better be diversified.
Here is Zeke Ashton on the other side of the coin, and I love the "find ideas that work best in your hand".
I have discovered that I feel very comfortable with a very concentrated portfolio. For example, I don't mind having positions that each make up 30%+ of my total portfolio. A dream scenario for me would be 3-5 asymmetric holdings and nothing else.
Anyone else feel this way? I know that many of us are investing in the same companies, but there seems to be a vast difference in how concentrated we are. It confounds that someone can love an idea so much, but then limit it to a 4% position.
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Seems like the thing to do is just to hire smart people to be teachers, pay them well, and get out of their way.
It is a little more complicated than that:
* How to avoid free riding? you need a professional ethos, where you can trust the teachers and avoid measurement.
* How to build a continuous improvement process? this reminds me a lot of Japanese Total Quality, and as the US automakers showed, it takes decades for the necessary cultural change.
* How do you built standardization at the teacher level in a decentralized post-graduate system, like the American and Latin American one? It needs a lot of government involvement, some would say socialistic.
* How can it be scaled w/o the social glue of a small country with uniform ethnicity?
… and those are just a few. That's why I wished they had discussed a lot more about the history of how Finland got there. For example, I don't see the Mexican teacher's union not making a mess of a plan like this.
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http://online.wsj.com/article/SB10001424127887324660404578201593636497964.html
In Western Europe, drug-resistant strains of TB are starting to make a wider appearance. Last year, Britain reported 421 cases of drug-resistant TB, a 26% jump from the previous year. Most Western Europe cases can be traced to the TB-wracked eastern half of the continent. (In contrast, there were 124 case of drug-resistant TB in the U.S. in 2011.)
Nearby nations, including Serbia, Kosovo, Montenegro and hard-hit areas in Russia, have sought Estonian advice in their own fight against the disease—and they need it. The 15 countries of the former Soviet Union, as well as Romania, Bulgaria and Turkey, together harbor more than 85% of TB cases, and 96% of multidrug-resistant tuberculosis, or MDR-TB, found in Europe, according to the World Health Organization.
"Eastern Europe is in a disastrous situation with MDR-TB and it risks compromising anything you can do" globally, said Mario Raviglione, who has led the WHO's TB program for nearly a decade.
At least 30% of all new TB cases in Eastern Europe are now resistant to key front-line drugs. The equivalent official rate is 6% for China and 2.1% for India, though the latter is probably an underestimate. (In absolute numbers, India and China have far more multidrug-resistant cases because of their larger populations.)
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Decent, but wish it had a healthier dose of skepticism to learn more about the root causes of the Finns' success and how to get there.
Hey thanks Plan will check it out when I get a chance. How do you rate the documentary?
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Why Are Finland's Schools Successful?
2011 documentary
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Top Blunders of 2012.
http://search.autonews.com/v/68843444/top-blunders-of-2012-12-26-12.htm?
2012 Marketing Moments
http://search.autonews.com/v/68936540/2012-marketing-moments-12-27-12.htm
2012's Movers and Shakers
http://search.autonews.com/v/69018412/2012-s-movers-and-shakers-12-28-12.htm
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Thanks txixo. Your big shock exception seems similar to what's been seen in Latam.
Well, I was running many backtests, using several mechanical value strategies in different continental European markets, and I noticed that there was a significant correlation between outperformance and size (number of stocks) in the market. The best markets for value investing were France and Germany. Italy's economy is comparable in size with France or the UK, but has many fewer listed stocks with a significant volume. My interpretation is that it is much easier for an Italian fund analyst to know very well all the stocks in their market than for French or UK ones to do the same, so mispricing does not happen so often. Unless you have a big shock like the one we are going through now...
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Where is some research of this issue of shallow financial markets? I'm very interested in it.
Now regarding Mundocom and Hermanos Lehman (LoL!) those are the kinds of issues that can be anticipated with some financial literacy. The problem is when you are completely robbed of legitimate assets because of lack of control. This is not completely absent in the USA either (Biglacough!) but you have to have a sense of proportion, and if you have ever invested in Latin America ...
The most outrageous example is Salinas Pliego in Mexico (Elektrta, TV Azteca) and he is not the only one. That issue substantially reduces the size of ponds that are small to begin with. Most firms are under very tight control with a near impossibility of activist investing.
There is still a tradition of value investing in Latin America but with CONTROL, where cash can take advantage of financial crisis to buy companies under duress (Giofranchi's rule?). But is a game for the big guys. For example, Anacleto Angelini though he was an Italian immigrant that rode trucks in Abisinia still started relatively big with his own paint factory and married into local money.
http://variantperceptions.wordpress.com/2010/12/17/remembering-a-predator/
Some think that because these markets are more inefficient, opportunities must be plenty but it is still difficult to grow from scratch just as a value investor. And that is reflected in a large tradition of "tips" ... that in developed markets would be called inside information. Just recently, a couple of DyS (largest Chilean supermarket chain) directors were prosecuted over transactions done by related parties over the Walmart acquisition. Also in his previous life, the current billionaire Chilean president had to give explanations over some big suspect transactions very close to a bad earnings release of Lanchile, company he controlled. And he was running for President ... not even Berlusconi has that chutzpah.
Now, things are changing in several countries especially Chile where private pension plans has forced tougher regulation and regulators. Not that some European multinationals have not tried abusing minority shareholders (ie: case Chispas, Endesa Espana) even there. But the problem remains that if you are a small investor in a shallow market the investing craft is difficult to practice. The internet with access to larger markets has been a blessing for the few of us in Latin America.
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And I wrongly thought all contrarians were somber and sad, instead we are all shiny and happy. Happy holidays.
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It's an economy with tailwinds: housing and autos. – Tepper.
Gio, that's the key quote, and it's something that people that read CalculatedRisk and follow those sectors know too well. And when he explodes to the commentators at some point, saying that the FED is really helping to get those sectors moving, he is stating the obvious if you forget philosophy and just read the data.
Regarding QE affecting valuations, probably Tepper is just talking his book. I just know that we, the Corner of Berkshire and Fairfax board, are finding really cheap stuff in several sectors that would benefit greatly from a reversion to the mean in housing and autos.
Sometimes is obvious.
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As to the value of the dollar being questioned. That is part of the plan.
+1
It's not a bug …
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Exit polls: LDP wins clear majority with 275-300 seats
http://www.japantoday.com/category/politics/view/exit-polls-ldp-wins-japan-election
Can Shinzo Abe Save Japan?
Concentration
in General Discussion
Posted
Yes, there are many arguing for diversification on a Fama/French/Markowitz abstraction style. Not many have dealt with the issue of Stock Picking Ability versus AUM Incentives. Maybe you have one?