Cooperman Says Earning 13% in Stocks Takes ‘Average IQ’

[twacowfca]

Ironically,  Sellers blew up without good risk control during the financial panic.  No need to feel sad for him though.  He took his high water mark fees ($30m or so), closed down his fund with no attempt to gain back his clients' losses and retired to enjoy being a big fish in the microbrewery pond.

 

Not to justify Sellers but all I've heard about that situation is that he had an awful time. Friendships and business relations were finished. As a fund manager put it to me, "he is done in this business". And at the time he was very close to making it to the big leagues, like $300 million AUM and a column in the Financial Times.

 

From there to managing pubs and fighting lawsuits left and right? Not that I wouldn't like to be in his present situation but without the baggage and there is a baggage.

 

And his big sin? Everyone made so much of his concentration but I think most in this board will recognize that it is a perfectly reasonable strategy if your picks are OK. His most important pick Contango MCF, the reason for his breakout but also his fallout, had such a margin of safety that survived pretty decently a failed sale, the collapse of Lehman, and one of the outstanding commodity bear markets on record (natural gas). Premier Exhibitions? That was a bigger mistake, go to variant perceptions if you want the whole story, but many had worse sins (Fannie, AIG, Washington Mutual) and he was not alone in having to recover from a bad 2008.

 

The problem seems to me that he did not have a chance for a comeback:  too many recent investors that did participate in his breakout years, too much hot money from funds of funds, and he did not short. And those investors left him before he could get to the "oversexed man in a brothel March 2009".

 

On the other side when you have a big opportunity, a once in a lifetime opportunity like let's say TARP warrants, do you want to dilute returns over-diversifying, timing or shorting so you can:

 

1. handle investors pre-conceptions and ST time frames, like Burry had to face.

2. have space in a bear market, to survive a deepening of that bear market, like Munger had to face.

3. avoid short sellers moving against you betting your clients will desert you, like Berkowitz had to face.

 

How to build a business so we can protect investors from themselves and you can get to the other side? One of the reasons I love following this board is learning from others in this area. There is more to this business than being a good investor.

 

Yes to your last statement.  We all have our blind spots.  "Wud ta 'ave tha gift he gae us t' see ourselfs as ithers see us.". But it's so much fun to pick apart others flaws.

 

The cardinal sin and fatal flaw of the geniuses at LTCM was being EMH believers and not sizing their bets conservatively to provide a margin of safety to live to fight another day. That flaw was compounded by their non genius leader's being a martingale man who often doubled down on a bad bet instead of cutting his losses.

 

Sellers blind spot was having a superficial experience with card counting and Kelly bet sizing.

 

Old time successful card counters know that lots of things can come at you unexpectedly like having a cheating dealer.  Therefore, they never use full Kelly bet sizing.  Even a half Kelly may be too much if someone doesn't have a lot of experience.

 

A full Kelly can blow up a fund easily merely through a random draw without even experiencing a black swan flying over and crapping on your head.  With a full Kelly, there is a 50% chance of a 50% drawdown of your capital.  If that happens without a lock up, there will be a run on the bank, and that fund is toast.

[Kiltacular]

The cardinal sin and fatal flaw of the geniuses at LTCM was being EMH believers and not sizing their bets conservatively to provide a margin of safety to live to fight another day. That flaw was compounded by their non genius leader's being a martingale man who often doubled down on a bad bet instead of cutting his losses.

 

I'd add, too, that for me one of the lessons from LTCM is that you can be sure (AND CORRECT) about what has to happen -- on the run and off the run Treasury prices will converge, for example -- and still lose your ass.  Why? 

 

Because, others things can happen first.

 

When you're highly leveraged, everything goes to zero on a long enough time scale.

 

Things that haven't happened before will happen. 

 

Buffett has been talking about this since Taleb was in high school. 

 

Buffett was able to get extraordinarily wealthy -- because he was so good at this -- even without leverage (though the float was a big help in Berkshire's golden period).  And so, if you follow his example, it is almost certain that you won't get the same returns without a lot of borrowed money.  And, if you borrow a lot of money...

 

It is hard to do extremely well without leverage and that is why it will always be the sirens's song of the investment game.

[twacowfca]

The cardinal sin and fatal flaw of the geniuses at LTCM was being EMH believers and not sizing their bets conservatively to provide a margin of safety to live to fight another day. That flaw was compounded by their non genius leader's being a martingale man who often doubled down on a bad bet instead of cutting his losses.

 

I'd add, too, that for me one of the lessons from LTCM is that you can be sure (AND CORRECT) about what has to happen -- on the run and off the run Treasury prices will converge, for example -- and still lose your ass.  Why? 

 

Because, others things can happen first.

 

When you're highly leveraged, everything goes to zero on a long enough time scale.

 

Things that haven't happened before will happen. 

 

Buffett has been talking about this since Taleb was in high school. 

 

Buffett was able to get extraordinarily wealthy -- because he was so good at this -- even without leverage (though the float was a big help in Berkshire's golden period).  And so, if you follow his example, it is almost certain that you won't get the same returns without a lot of borrowed money.  And, if you borrow a lot of money...

 

It is hard to do extremely well without leverage and that is why it will always be the sirens's song of the investment game.

 

The sad truth is that markets really are getting more efficient in the sense that spreads are narrowing on average for all sorts of trades.  The profit margin has  narrowed for all the different hedge fund strategies that used to work so well for people like Thorp in the early days of systematic trading.  Ergo the use of leverage which leads to blowups.

 

But big banks don't have to borrow money to engage in such risky trades.  They simply make multi billion dollar trades with other banks and then declare that some related trade offsets and balances the first trade.  Trading that isn't market clearing is a big lie in aggregate because of the size of the positions.  The recent difficulty JPM continues to have with only one trade involving less than $100B notional amount is only the tip of the tip of the iceberg.

 

Any one of the biggest banks would almost certainly go bust if they tried to unwind all of their derivative trades in a year or so.  How do I know this?  Because Gen Re actually wound down their whole book with great difficulty over several years, with significant losses even though they waited patiently for the most opportune times to close out different positions.  And their whole book was 'only' $30B or so if I'm not mistaken. Most of the big banks are said to have derivative books that are somewhere between 100 and 1000 times the size of Gen Re's book.

[infinitee00]

And by the way, there are several strong reasons to believe that ambition and drive is mostly genetically influenced too - or atleast not any evidence that says it's environmentally decided :) Separate twin studies suggest that they have pretty much the same lifetime earnings even if they grow up in different socio-economic environments... 

 

 

Interesting assertion. Btw, absence of evidence is not evidence of absence. Given that drive and ambition are based a lot on circumstances and are such subjective ideas that are difficult to define, I am interested to learn more.  The only article I could find online was an article from Time - not the most credible of magazines when it comes to unbiased scientific reporting - and that article too couldn't give any conclusive evidence for the claim that ambition is genetically influenced. If you have access to any scientific literature from credible scientific journals, I would be interested to read it. What were the sample sizes used or how were the studies controlled for environment/culture/nationality etc? Was it an observation based study or a questionnaire based study? The reason I am asking is because some similar studies I have come across seem to be methodologically flawed.

[alwaysinvert]

And by the way, there are several strong reasons to believe that ambition and drive is mostly genetically influenced too - or atleast not any evidence that says it's environmentally decided :) Separate twin studies suggest that they have pretty much the same lifetime earnings even if they grow up in different socio-economic environments... 

 

 

Interesting assertion. Btw, absence of evidence is not evidence of absence. Given that drive and ambition are based a lot on circumstances and are such subjective ideas that are difficult to define, I am interested to learn more.  The only article I could find online was an article from Time - not the most credible of magazines when it comes to unbiased scientific reporting - and that article too couldn't give any conclusive evidence for the claim that ambition is genetically influenced. If you have access to any scientific literature from credible scientific journals, I would be interested to read it. What were the sample sizes used or how were the studies controlled for environment/culture/nationality etc? Was it an observation based study or a questionnaire based study? The reason I am asking is because some similar studies I have come across seem to be methodologically flawed.

Of course not, but a causal link can never be established. You can only draw inferences from the (non-)existence of correlations.

 

The thing I quoted about twins I am 99% sure that I got from Bryan Caplan, but I can't seem to find it again. However, he has done no such study so I am gathering he got it from someone else, like Taubman, 1976 (here: http://www.jstor.org/discover/10.2307/1827497?uid=3738984&uid=2&uid=4&sid=56284796393). Of course, since that is a study only on white males in America, it does not deal with extreme environmental differences (of which I am sure we would see different outcomes - sending one child to Somalia and one to Monaco will show up in future income).

 

Overall, I am obviously no expert on the subject but my impression is that scientific consensus has moved from the tabula rasa theory to a worldview of most things about our behaviour being genetically decided or at least heavily influenced. Ambition and drive in particular certainly feel like things that should be under our control, but then again evolutionary psychology predicts that being a very useful illusion for us as human beings, so I stay sceptical of that. However, almost no one is very keen on the idea of powerful genes. Liberally minded people think it makes the world even more non-egalitarian and conservatives are afraid that the image of the self-made man could be tarnished.

[twacowfca]

And by the way, there are several strong reasons to believe that ambition and drive is mostly genetically influenced too - or atleast not any evidence that says it's environmentally decided :) Separate twin studies suggest that they have pretty much the same lifetime earnings even if they grow up in different socio-economic environments... 

 

 

Interesting assertion. Btw, absence of evidence is not evidence of absence. Given that drive and ambition are based a lot on circumstances and are such subjective ideas that are difficult to define, I am interested to learn more.  The only article I could find online was an article from Time - not the most credible of magazines when it comes to unbiased scientific reporting - and that article too couldn't give any conclusive evidence for the claim that ambition is genetically influenced. If you have access to any scientific literature from credible scientific journals, I would be interested to read it. What were the sample sizes used or how were the studies controlled for environment/culture/nationality etc? Was it an observation based study or a questionnaire based study? The reason I am asking is because some similar studies I have come across seem to be methodologically flawed.

Of course not, but a causal link can never be established. You can only draw inferences from the (non-)existence of correlations.

 

The thing I quoted about twins I am 99% sure that I got from Bryan Caplan, but I can't seem to find it again. However, he has done no such study so I am gathering he got it from someone else, like Taubman, 1976 (here: http://www.jstor.org/discover/10.2307/1827497?uid=3738984&uid=2&uid=4&sid=56284796393). Of course, since that is a study only on white males in America, it does not deal with extreme environmental differences (of which I am sure we would see different outcomes - sending one child to Somalia and one to Monaco will show up in future income).

 

Overall, I am obviously no expert on the subject but my impression is that scientific consensus has moved from the tabula rasa theory to a worldview of most things about our behaviour being genetically decided or at least heavily influenced. Ambition and drive in particular certainly feel like things that should be under our control, but then again evolutionary psychology predicts that being a very useful illusion for us as human beings, so I stay sceptical of that. However, almost no one is very keen on the idea of powerful genes. Liberally minded people think it makes the world even more non-egalitarian and conservatives are afraid that the image of the self-made man could be tarnished.

 

Suggest you order a copy of the out of print book: The Truth About You, by the late Dr Arthur Miller.

 

Whether genetic, epigenetic, environmental, imprinting or whatever, we all have tropisms, or motivated abilities that become manifest at an early age and continue without essential change for the rest of our lives.  :)

[PlanMaestro]

Steven Pinker, The Blank Slate

[infinitee00]

 

Overall, I am obviously no expert on the subject but my impression is that scientific consensus has moved from the tabula rasa theory to a worldview of most things about our behaviour being genetically decided or at least heavily influenced. Ambition and drive in particular certainly feel like things that should be under our control, but then again evolutionary psychology predicts that being a very useful illusion for us as human beings, so I stay sceptical of that. However, almost no one is very keen on the idea of powerful genes. Liberally minded people think it makes the world even more non-egalitarian and conservatives are afraid that the image of the self-made man could be tarnished.

 

I would tend to agree that humans are not blank slates and may inherit traits from their parents and also that not all human traits can be defined by their experience/environments. However, my doubts on this matter stems from the fact that ambition and drive are not clearly defined and obviously have different degrees and facets to them. Just saying 2 people are ambitious does not say much about them. Also, studies have shown that even identical twins may not have same DNA at various points of their genome ( meaning identical twins may not be that 'identical'). It has also been observed that genetic rearrangements do occur as a person ages, so the differences between genetic makeup of twins would tend to increase with age. Moreover, it does not satisfactorily explain the opposite - why twins/triplets etc raised in the same household/environment display different degrees of motivation towards goals and have different economic status. So drawing conclusions on genetic makeup of ambition and drive based on earning power of individuals ( even twins) seem IMHO a possible case of poor sample size, incorrect problem formulation or even selective evidence gathering/confirmation bias. I somehow remain skeptical of the inferences/conclusions drawn.

[Charlie]

"Whether genetic, epigenic, environmental or what, we all have tropisms, or motivated abilities that become manifest at an early age and continue without essential change for the rest of our lives.  :)"

 

Buffett said a good indicator for business success is at which age you start your first business.

I would say the abilities stay the same for most of your life but your incentives probably change with your age and money dependent of your own needs (Maslow´s hierachy of needs).  :)