One from the vault of Clarke and Dawe who remain probably the best commentators on the financial system going around.
Around this time of year there is always a bit of chatter regarding a Christmas rally, so instead of relying on myth and hyperbole as most of the financial community do I thought I would fire up excel and have a look. The table below is of the average percentage gain for each month going back 30 years.
It seems that most markets do indeed enjoy a lift in December. However, the thing that interested me about this data was the bump in the middle of the year for the Nikkei – I am not certain why this is so.
The reviewer keeps comparing it to the GT3 which is a valid comparison if you are going to spend that much money. However, an afternoon in a GT3 will guarantee you a months worth of physiotherapy particularly if you hit a railway crossing at speed.
What could possibly go wrong…..
When Douglas Kobak was an adviser at a large brokerage firm, he suggested his wealthiest clients buy a hedge fund promising to be “a very conservative alternative to bonds.” Then the credit crisis hit in 2008, the fund imploded and investors got 45 cents on the dollar — as long as they promised not to sue.
Since then, mediocrity is more common than blow-ups. Hedge funds have lagged behind stocks while still charging fees of up to 2 percent of assets and 20 percent of gains. For the rich and their advisers, “the sex appeal of hedge funds has worn off,” says Kobak, now head of Main Line Group Wealth Management.
Guess what the hedge fund firms are doing now?
Hunting for new, less skeptical customers.
While only those with at least $1 million are allowed to invest in hedge funds, anyone can buy a mutual fund with a hedge fund strategy. Unfortunately, these “alternative” funds come with the same disadvantages hedge funds have: high fees, inconsistent performance and strategies that take a PhD to decipher.
By starting alternative funds, mutual fund companies get a chance to bring in revenue they’re losing to cheap index funds and exchange-traded funds. In a deal announced Nov. 18, Blackstone Alternative Asset Management is coming up with hedge-fund-like products for mutual fund company Columbia Management. They’ll join 11 other U.S. mutual funds and ETFs classified by Bloomberg as “alternative,” which together hold $68 billion in assets.
More here – Bloomberg
One of the more frustrating things about trading is that in some ways your returns are bounded by the environment within which you are investing. This is particularly true if you are dim enough to be a buy and hold investor. The underlying sentiments of markets ebbs and flows and this sentiment infects all aspects of the market. as the old saying goes all ships float on a rising tide, implying that bull markets are good for all stocks and I believe this to be largely true. For aggressive disciplined traders bull markets present a cornucopia of opportunity that is too good to resist. However, flat markets are painful and dull and once again they are especially painful for those who are inactive investors who are merely carried along by what is happening.
I wanted to look at the broad distribution of returns of various periods – this is one of those dodgy back of the envelope things that I like to do. What I did was look at the three metrics as applied to the All Ordinaries, the value of $1 invested for the time period, the maximum drawdown for that period and the annualised return. These are shown below.
I broke the returns up into decades since this is about the average lifespan of an investor/trader. So for the period 1991 to 2001 if you had invested $1 into the All Ordinaries at the beginning of this period by the end it would have been worth $1.98. During that period you would have had to endure a maximum drawdown in your investment of 22% and your annualised return would average out at 7.1%.
There are a few interesting points to this table -
1. The index only produced double digit average annualised growth once in this survey. For the decade sized samples from 1998 onwards the returns were very modest.
2. A single event such as the GFC can have a devastating impact upon long term investment strategies. If you do not take any prudent measures to avoid or manage them. it should be remembered that we are encountering such events about once every ten year.
3. The best decade was 1997 to 2007. However, if I look at these returns in more detail this decade had four good years that produced most of the returns. If I isolate this period of 05/03 to 09/07 I found that $1 invested at the beginning of this period had grown to $2.09 by 09/07 with an annualised rate of return of 18.9%.
4. When you invest matters.
For the sake of completeness I did look at the returns for simply holding throughout this period and the results were as follows -
The above table puts into perspective much of the hype you hear from find managers about being in the market for the long haul, good shares always get better, dont miss the good day blah…blah…blah. Very little that is said by the sell side of the industry stands up to scrutiny – what you see here is very modest returns. I feel that the central point is that the majority of returns are made during very select periods of time and outside of those periods traders either need to be very active or simply search further afield for opportunities.
And you may find yourself living in a shotgun shack
And you may find yourself in another part of the world
And you may find yourself behind the wheel of a large automobile
And you may find yourself in a beautiful house, with a beautiful wife
And you may ask yourself
Well…How did I get here?
Once In A LifeTime – Talking Heads.
This summer, a friend called in a state of unhappy perplexity. At age 47, after years of struggling to find security in academia, he had received tenure. Instead of feeling satisfied, however, he felt trapped. He fantasized about escape. His reaction had taken him by surprise. It made no sense. Was there something wrong with him? I gave him the best answer I know. I told him about the U-curve.
Not everyone goes through the U-curve. But many people do, and I did. In my 40s, I experienced a lot of success, objectively speaking. I was in a stable and happy relationship; I was healthy; I was financially secure, with a good career and marvelous colleagues; I published a book, wrote for top outlets, won a big journalism prize. If you had described my own career to me as someone else’s, or for that matter if you had offered it to me when I was just out of college, I would have said, “Wow, I want that!” Yet morning after morning (mornings were the worst), I would wake up feeling disappointed, my head buzzing with obsessive thoughts about my failures. I had accomplished too little professionally, had let life pass me by, needed some nameless kind of change or escape.
My dissatisfaction was whiny and irrational, as I well knew, so I kept it to myself. When I thought about it—which I did, a lot—I rejected the term midlife crisis, because I was holding a steady course and never in fact experienced a crisis: more like a constant drizzle of disappointment. What annoyed me most of all, much more than the disappointment itself, was that I felt ungrateful, the last thing in the world I was entitled to be. Hopeful that rationality might prevail, I would count my blessings, quite literally—making lists mentally, and sometimes also on paper of all that I had to be thankful for. Reasoning with myself might help for a little while, but then the disappointment would return. As the weeks turned into months, and then into years, my image of myself began to change. I had always thought of myself as a basically happy person, but now I seemed to be someone who dwelt on discontents, real or imaginary. I supposed I would have to reconcile myself to being a malcontent.
More here - The Atlantic – The Real Roots of Midlife Crisis