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What We're Reading This Week

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September 28, 2017

What We're Reading This Week

Author: Thad Schlaud

Topics: Careers, News, The Market, Industry Ideas

Market News

As the market continues to climb upward, we will be inundated with two types of news: YOU CAN’T TIME THE MARKET (always around but more prevalent the higher we climb) and WHAT TO DO ABOUT THE UPCOMING CRASH (also always around but definitely increasing the higher we climb). This article caught my attention as an example of the former.

The question is, “Should investors attempt to time the market or not?

“In fact, most investors are horrible at market timing. By my count, investors in actively managed U.S. stock funds captured just 71 percent of their funds’ returns over the last 10 years through July because of ill-timed moves in and out of those funds. By comparison, investors in U.S. stock index mutual funds captured on average 96 percent of their funds’ returns because they were more likely to buy and hold.”

Sure, I hear that all of the time. The issue is that not all investors have a 10-year time horizon. And also, yes, most individuals are terrible at timing the market. But, what about professionals? The article’s author is a professional money manager, what does he have to say?

“I attempted to quantify that payoff in a column last year by simulating a market-timing strategy that uses the cyclically adjusted price-to-earnings, or CAPE, ratio for U.S. stocks to allocate between stocks and bonds. The strategy favors five-year U.S. Treasuries when the CAPE is high and the S&P 500 when the CAPE is low, but always has a sizable exposure to each. My market-timing strategy beat buy-and-hold 72 percent of the time over rolling 10-year periods since 1926 by an average of 0.3 percent annually.”

I love the confidence here. Isn’t there a version of this where you are just bad at your job? The “buy and hold” drum is beat pretty hard by investment companies and “financial advisors” alike, so is it any wonder that the vast majority of young investors feel like there is nothing they can do about the next financial crisis?

There are some interesting psychology pieces here, namely, the word crisis. The word itself sort of implies a response doesn’t it? You want to respond to a crisis, don’t you? The truth is that the market goes up and down. If the answer is that you can’t do anything and you shouldn’t time the market, then what is the point of financial news? Unfortunately, most of it is designed to sell something, even if that something is advertisement space. Really, who would click on the headline: Will the market go up or down?!?!? Experts respond: Yes!”

 

Female Run Hedge Funds Outperform

In 2017 female run hedge funds have returned twice as much as male run hedge funds. This is…news?

Performance was measured by the HFRX, an index of female run hedge funds, and compared to HFRI, a broader index that includes all hedge funds.

“Hedge funds run by women have generated returns two times higher than their male counterparts this year, piling further pressure on a sector that has been branded ‘male, pale and stale’ to recruit more female portfolio managers.”

Hey, I’m all for rebranding my image…but I have never heard that expression and it’s troubling. Admittedly, I am male and pale, but stale? It’s hard to not take that personally.

“Helena Morrissey, head of personal investing at Legal & General Investment Management, the $1.1tn fund house, cautioned that the HFRX data looks at a short timeframe, but added other research had found women were ‘at least as good as men’ when investing.”

Ok, now that’s pretty rough. I feel like it has to be really hard, as a woman, to utter the phrase, “Women are at least as good as men at investing.” Were we researching that? I feel like the response to that conclusion must be: “Well, obviously.”

“Nicole Boyson, associate professor of finance at Northeastern University in Boston, said it was not clear if women were inherently better hedge fund managers than men over the long term. But she added: ‘We can say pretty definitively that women are not worse performers.’”

I can say this, women in this industry are definitely not more confident than male investors.

Ultimately, the issue here is that this is an extremely difficult industry for women to enter and ultimately thrive in. The sad part is that it has nothing to do with performance or ability (obviously) but because of the stale, pale, males.

 

Insider Trading

Avid readers know that I do love a good insider trading story. This is mostly because insider trading court cases are so silly. Sometimes something is insider trading, sometimes it’s not, it really comes down to how the court feels.

Anyway, back in 2013 Richard Lee pleaded guilty to insider trading from 2009. In 2017 Richard decided to withdraw his plea because he remembered that he didn’t do it!

“Lee ‘labored under a significant misapprehension of the facts of his own case’ and now wants a dismissal or else a trial date, his lawyer Gregory Morvillo wrote.”

Bummer.

“Prosecutors have not allowed the plea withdrawal, Monday’s filings show.”

Good. I’m not an attorney but it seems like the ultimate achievement to get a defendant to accidentally plead guilty to a crime they didn’t commit.

It’s worth noting that he was to be sentenced next month. I mean, this is great timing. I have to think, insider trading may be one of the only crimes where you could plead guilty to it and 4 years later recall that you actually didn’t do it.

 

 

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