The Audacity of Bonuses at MF Global (Nomi Prins)

Tuesday, March 13th, 2012

Submitted by Nomi Prins

The Audacity of Bonuses At MF Global

In the spirit of George Orwell’s Animal Farm commandment: “all animals are equal, but some animals are more equal then others” comes the galling news that bankruptcy trustee, Louis Freeh, could approve the defunct, MF Global to pay bonuses to certain senior executives. This, despite the fact that nearly $1.6 billion of customer funds remains “missing” or otherwise partially accounted for, yet beyond the reach of those customers, perhaps forever, since before the firm declared bankruptcy on October 31, 2011.

Another commonality between the MF Global incident and Animal Farm is the abject rewriting, or re-interpretation, of rules. At the farm, the rule ‘No animal shall drink alcohol” was ultimately ‘re-remembered’ as ‘No animal shall drink alcohol to excess.’ Absent opposition to this particular fact alteration, the pigs got drunk. It wasn’t pretty.

The Orwellian nature of finance is spiraling out of control. It was acutely demonstrated during the fall 2008, merge-and-be-bailed period, and subsequently, through mainstream acceptance that “too big to fail” validates the subsidization of reckless banking practices (bail first, ask questions or consider tepid regulation later), and the European debacle.

Three wrinkles of audacity underscore the potential MF Global bonus approvals. First, there is the moral responsibility layer. MF Global, classified as a broker-dealer wasn’t specifically subject to the investment-advisor fiduciary rule that requires ‘systemic safety and soundness’’ with respect to retail customers. But, comingling customers’ funds inappropriately with the firm’s, as former chief, Jon Corzine’s European bets were blowing up, was an abject misinterpretation of the rule’s intent.

Aside from that, MF Global lied about funds segregation to its customers, which constitutes fraud. The final page of the firm’s brochure touts “the strict physical separation of clients’ assets from MF Global accounts.”

Separately, MF Global broker-dealer activities were subject to SEC oversight and restrictions on its use of client funds. During any normal investigation, like say for embezzlement, funds should be frozen until issues are resolved. Releasing any bonus pay until this matter is settled is just plain wrong.

The reason for possibly allowing bonuses for MF Global chief operating officer, Bradley I. Abelow, finance chief, Henri J. Steenkamp, and general counsel, Laurie R. Ferber follows the same twisted logic pervading Wall Street: no one else can do the job as well.

These people are apparently so special that despite incompetence, negligence or potential malfeasance in diverting customers’ funds away from their rightful spots, their expertise is critical to the bankruptcy proceeding. In that realm, their ‘job performance’ will help Freeh “maximize value for creditors of the company”. Translation: it will ensure banks like JPM Chase keep their cut, since customers are not creditors. Again, plain wrong.

But forget simple matters of right and wrong for a moment. After all, this is Big Finance: what’s most important is what’s not necessarily what’s legal or illegal, but more practically, what you can get away with and what you can’t. In that regard, the sheer impotence of regulators, the Department of Justice, and the FBI are enabling factors in perpetuating financial crimes.

In early 1933, during the Depression that followed the 1929 Stock market Crash, Democratic president, FDR and Republican Treasury Secretary, William Woodin, declared a bank holiday, during which Treasury Department agents examined banks’ (which included at the time, broker-dealers) books to determine solidity and solvency.

Today, our regulatory bodies are incapable, or simply don’t want to be bothered with, tracing money and returning it to the public customers to whom it belongs. The inability to independently examine MF Global’s books, without its executive involved, reveals the sorry state of our financial system.  In this post-Glass-Steagall-repeal world, the mixing of customer money and speculative betting – whether at a super-market bank or broker-dealer, whether involving subprime loans packages or European Sovereign debt, poses too dangerous a level of complexity. If regulatory bodies can’t, or won’t, diminish the related risk, more concrete Glass-Steagall boundaries throughout the financial framework should be resurrected.

Meanwhile, two senators have taken on the bonus-pay fight. Senator Amy Klobuchar (D., Minn.), member of the Senate Agriculture Committee investigating MF Global, wrote to Freeh that the plan is “unacceptable.” Senator Jon Tester (D., Mont.), whose constituency includes a number of farmers with funds in the ‘missing’ category, called it “outrageous.”

On Sunday, Freeh’s spokesperson released a statement saying the senators’ concerns were ‘noted’ and a final decision on the bonuses hadn’t been made. But to the extent that the money trails shrouding MF Global’s final moments remain more apparent to its former employees than external examiners, it’s likely the people involved in the wreckage, will be paid extra for sorting thru it. And, that’s an expensive, outrageous, shame.

Copyright © Nomi Prins

Tags: Agriculture, Animal Farm, Audacity, Bankruptcy Trustee, Broker Dealer, Comingling, Commonality, Customer Funds, George Orwell, Investment Advisor, Jon Corzine, Louis Freeh, Mainstream Acceptance, Mf Global, Misinterpretation, Moral Responsibility, Nomi Prins, Retail Customers, Senior Executives, Subsidization, Systemic Safety
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Investors Losing Faith in Hedge Funds?

Friday, March 9th, 2012

 Nathan Vardi of Forbes reports, Investors Are Starting To Lose Faith In Hedge Funds:

For a long time, it seemed like nothing could diminish investor appetite for hedge funds. Even after the financial crisis embarrassed some of the industry’s most high-profile investors and caused the industry’s assets to tumble as hundreds of hedge fund closed in 2008, the hedge fund business quickly recovered. Last year the industry’s assets reached an all-time high of $2 trillion.

But 2011 turned out to be one of the hedge fund industry’s worst years ever. The average hedge fund fell by 5%. The average hedge fund specializing in equities fell by 8%. Hedge fund titans like billionaire John Paulson had a terrible year and lost massive amounts of money. At the same time, the S&P 500 returned a positive 2%. Evidence has started to emerge that some investors may have had enough.

According to research firms Barclays Hedge and TrimTabs, investors redeemed $15.2 billion from hedge funds in January, the highest outflow since the height of the credit crisis in January 2009.

This could only be the start of a river of outflows if hedge fund performance doesn’t improve soon. In January, hedge funds again trailed the U.S. stock market. The average hedge fund posted a positive return of 3.1%, underperforming the S&P 500, which returned 4.2% in January. Bank of America Merrill Lynch says that its investable hedge fund composite index was up 1.19% in February, yet still underperformed the S&P 500 by 2.87%.

“If hedge funds don’t deliver in aggregate this year, it is going to be a very real problem for the industry,” says Brad Balter, a Boston-based investment advisor who oversees just under $1 billion and farms out money to hedge funds. “2011 had a very volatile 3^rd quarter which hurt everyone, but if we go through another period of underperformance investors will question using them.”

FINalternatives also reports, Hedge fund redemptions , assets up in February:

Investors pulled $15.2 billion from hedge funds in January 2012, as overall industry assets climbed to $1.70 trillion from $1.68 trillion at end-2011.

According to BarclayHedge and TrimTabs Investment Research, hedge funds underperformed the S&P 500 by 110 basis points for the month.

“Hedge funds managed a 3.1% return in January after posting losses in seven out of the last eight months of 2011,” said Sol Waksman, founder and president of BarclayHedge. The benchmark S&P 500 Index returned 4.2% in January after outperforming the hedge fund industry for all of 2011.

“January marked the biggest monthly outflow since July 2009, when hedge funds redeemed $17.7 billion,” said Leon Mirochnik, an analyst at TrimTabs. “The hedge fund industry has experienced net outflows in four out of the last five months.”

Fixed income, multi-strategy, and merger arbitrage hedge funds are the only strategies to have seen net inflows since September 2011. Multi-strategy funds led, pulling in $2.6 billion in January. Mirochnik says investors seem to be “piling into strategies that can benefit from geopolitical uncertainty around the world.”

Funds of hedge funds underperformed their hedge fund counterparts by 140 bps, returning 1.7% in January and Mirochnik thinks FoF managers might have difficulty explaining “their layers of fees” to clients given that funds of funds have underperformed hedge funds by 200 bps over the past year.

In related news, hedge fund managers polled by TrimTabs/BarclayHedge remain bullish on U.S. securities, although the sentiment was less marked in February 2012 than in the previous month. Of the 105 hedge fund managers surveyed in the third week of February 2012, 40% were bullish on the S&P 500, compared to 45.4% in January. Bearish sentiment rose to 30.5% in February from 25.0% in January.

Nearly 30.0% of managers believe that U.S. equities will be the top-performing investment over the next three months. Gold came in second at nearly 23.0% followed by oil with 20.0%.

So what is going on? Are investors “losing faith” in hedge funds? Not exactly. They are simply becoming more aware that most hedge funds are full of it, charging 2% management fee and 20% performance fee for beta. And as we saw in 2011, most hedge funds had a a hard time even delivering beta, underperforming the market.

All this prompted Mindful Money to ask, Is this the end of the hedge fund manager?:

The headline that hedge fund bosses seem to have made a bit of cash in 2011 will hardly surprise many of the cynics who see them as more bogeymen of the financial services industry, alongside bankers. But these inflated pay-packets certainly seem counterintuitive at a time when many are predicting the end of the hedge fund manager altogether.

This Reuters piece, based on a Forbes survey showed that: “The top 40 highest-earning hedge fund managers took home a combined $13.2 billion… The top 10 hedge fund managers made more than $200 million each, while the lowest earning managers made $40 million each.”

But the report coincides with a Times article (paywall) predicting the end of an era for hedge fund managers: “Last year was a disaster for the $2 trillion hedge-fund industry. Desperately hoping for a recovery from the 2008 financial crisis, hedge funds actually lost investors 5 per cent in 2011, with some slipping as much as 50 per cent. Investors pulled millions of pounds out and hundreds of smaller hedge funds have closed.”

One analyst, who recently left a hedge fund, is quoted as saying: “The industry’s gone through cataclysmic change. There’s much more scrutiny. People are asked to work harder, in a more regulated environment, for less money. Everything’s more serious – you can’t send rude e-mails any more – it’s death by a thousand cuts.”

So how to explain these giant pay-packers? The Reuters article points to the fact that the more successful hedge funds are mopping up disillusioned investment bankers ahead of the imposition of the Volker rule, which seems to have benefited groups such as Europe’s Brevin Howard.

There certainly is more interest in alternatives. The most recent Morningstar fund flows survey showed that as risk appetite has increased, so has interest in alternatives: “Other broad asset classes also reversed the negative momentum of 2011′s second half. Funds in the allocation, alternatives, and commodities groups all enjoyed modest inflows in January.”

But this is benefiting some groups more than others. Man Group, the largest listed hedge fund managers has reversed a run of difficult performance: “Man said assets under management had risen to $59.5bn from $58.4bn at the end of December. Chief executive Peter Clarke told Reuters: If sentiment is maintained and performance continues, we’d expect it to translate into rising sales and net inflows. Man also held its dividend payment, which some analysts had suggested might be cut.”

The big money has tended to be made in the larger macro hedge funds, which have been able to use the market volatility to their advantage. The trouble is that the environment has exposed those hedge funds that are not doing anything very different to long-only managers and charging a lot more for it.

This Zerohedge article goes some way to exposing the lack of imagination in some hedge funds. It points to Goldman research into hedge funds, which demonstrates, among other points, that; “hedge fund returns are highly dependent on the performance of a few key stocks. The typical hedge fund has an average of 64% of its long equity assets invested in its 10 largest positions compared with 34% for the typical large-cap mutual fund, 18% for a small-cap mutual fund, 20% for the S&P 500 and just 2% for the Russell 2000 index.” Secondly, the Goldman research found: “Apple (AAPL) matters. One out of five long/short hedge funds has AAPL among its ten largest long positions and approximately 30% of hedge funds own at least one share of AAPL. When it ranks among the top ten holdings, AAPL represents an average of 8% of single-stock long equity exposure. In aggregate, hedge funds own only 4% of AAPL equity cap. The average hedge fund AAPL position equals 1.6%, given 70% of funds own no AAPL.”

As the Times piece points out, both markets and investors are getting smarter. The credit crisis exposed the limitations of the hedge fund industry and created a new scepticism about financial services generally: “In his book The Hedge Fund Mirage, industry insider Simon Lack calculated that between 1998 and 2010 hedge-fund managers earned an estimated $379 billion in fees, out of total investment gains of $449 billion. In other words, they took 84 per cent of the investment profits, leaving just 15 per cent for investors.” This may work in bullish times, but not when investors are short of cash and have Madoff in the back of their minds.

Weakening returns have also exposed the high fixed costs of some hedge funds: “While some larger hedge funds are still profitable, many smaller ones cannot afford the high Mayfair rents they took for granted until recently” says the article.

In other words, the hedge fund industry is the same as any other, the strong are getting stronger and the weak are falling away. The credit crunch has ensured that the hedge fund industry is becoming as Darwinist as any other.

The strong are getting stronger, able to attract talent because they have the big bucks to pay top managers, but it goes far beyond this.

According to the fifth annual global study released by SEI in collaboration with Greenwich Associates, with significant dollars poised to flow into hedge funds in 2012, managers must address investor transparency and liquidity concerns to take advantage of new funding opportunities:

The second report in the two-part series, entitled “The New Dynamics of Hedge Fund Competitiveness,” indicates a need for hedge fund managers to move beyond portfolio transparency to provide investors with consistent and insightful communications along with direct access to investment teams. Liquidity and the inability to control exit strategies have also emerged as key concerns for hedge fund investors.

“Transparency has been the focus for managers in recent years, but we’re seeing clients look for increased personal interaction and dialogue. This Era of the Investor™ is pushing managers to look beyond standard expectations,” said Philip Masterson, Senior Vice President and Head of Business Development, Europe, for SEI’s Investment Manager Services division. “The environment is shifting and while managers are showing improvements in reporting, the study shows that portfolio transparency is simply not enough to satisfy investors anymore.”

Beyond communication, the survey shows that investors want greater detail in terms of security-level disclosure, including leverage detail, valuation methodology, and risk analytics. The study also showed that liquidity has emerged as a key area of concern among investors. Nearly a third of respondents (31 percent) cited ongoing liquidity risk among their biggest hedge fund investing worries, while “an inability to control exit strategy” was named by 46 percent of respondents.

“Evaluating and selecting fund managers has always been a top-of-mind concern for investors,” said Rodger Smith, Managing Director of Greenwich Associates. “What this study brought to light is that, as long as they can articulate their value proposition and differentiate themselves from their peers, there is a place for smaller and newer funds in institutional portfolios. In fact, one in five investors polled said they have no asset minimum requirements in order to invest, and while a majority of those surveyed said they seek hedge funds with a history of at least three years, roughly a quarter would consider less, and 14 percent would not eliminate a fund without a track record at all.”

Highlighting the increasing inability of investors to distinguish among strategies, 17 percent of respondents said manager selection is the single most important challenge facing hedge fund investors today. While 95 percent of respondents said clarity of investment philosophy is important or very important in the selection process, more than half of respondents (61 percent) said there are too many look-alike strategies in the hedge fund industry.

Given that challenge, more than half of respondents (51 percent) said hedge funds are too complex to evaluate without a consultant’s help. Respondents were decidedly mixed on the importance of brand in the selection process, while operations are clearly a critical aspect in selecting managers, with 80 percent of those polled agreeing that operational strength is a hallmark of an institutional-quality fund.

The white paper is published by the SEI Knowledge Partnership, which provides ongoing business intelligence and guidance to SEI’s investment manager clients. To request the full paper, visit http://www.seic.com/HedgeResearch2012.

Some consultants are working to address investors’ concerns over liquidity and transparency. Roger Kenyon, Senior VP at FIS Group, told me they have found a way to address the liquidity, transparency and investment concerns of investors looking to allocate to emerging hedge fund managers. Roger sent me these comments:

Investors have always been interested in investing in emerging hedge fund managers. No doubt this has been a natural inquisitiveness about anything new; the hope of discovering a spectacular talent; and also a possible morbid belief in discovering a future blow up. Research shows that new managers with limited assets to manage outperform more established managers.

Yet this has not prevented investors from introducing all sorts of preconditions that the manager must satisfy before investors will act. Even the definition of what constitutes an emerging manager seems to be unsettled. In the long-only area some investors define the category to be managers with assets below $2 Billion. Among hedge fund investors the cutoff seems to be $200 MM.

The difficulty in getting access to funding by emerging managers is primarily due to the fact that they do not share the same characteristics of established managers. This does not refer to their potential to produce skill based returns, but primarily to the absence of the support infrastructure of larger funds.

These structures usually provide investors with a sense of confidence that management is governed with features such as oversight, liquidity and transparency. Emerging managers would not be so classified if they were required to build up these capabilities before starting a business as the time and costs would be severe impediments.

Luckily, the market has responded to this gap and has addressed these infrastructure problems in a comprehensive manner. Emerging managers can now access all the institutional level back up required to produce accurate and timely valuations, counterparty controls, risk controls and limit monitoring. In this way the manager has the freedom to leverage his investment skills; and the investor can be confident in the investment decision because of the high level transparency.

The characteristics of these processes cannot be undervalued. They allow a smooth flow of information in periods agreed upon by both manager and investor. These periods can be daily or wider spaced. Each partner can communicate with each other as needed. Investors can view the information from a viewpoint chosen by the investor. No longer will the investor wait for the manager to an interpret performance. He will have seen the results and he will have been able to see whether they were within his investment framework.

Needless to say, both manager and investor can set benchmarks, allowable securities, risk controls, and general operating features that both feel comfortable with. With this capability in place, concerns about performance, strategy, strategy drift, use of cash, leverage, and tracking error and returns attribution can be analyzed rather than be an issue of uncertainty .

These types of facilities should provide investors to be more aggressive in sourcing, investing and having a positive returns experience with emerging managers. Investors will be able to continually tailor their allocations as required because they can be assured of being able to call on the liquidity conditions which were agreed.

Roger and I discussed how useless monthly “risk transparency” reports are and how investors who are looking to allocate to emerging managers are adopting this new approach to manage risk properly.

I cannot stress how important it is to look at emerging alpha talent, especially in this environment where there is a placebo effect of investing in large hedge funds. There is talent out there worth seeding but investors have to approach the seeding game a lot more intelligently.

Reuters reports that HSBC’s alternative asset management arm is scouring the market for promising new hedge fund managers, whose ranks are swelling ahead of the imposition of the Volcker rule, which cracks down on banks trading with their own money:

The rule could prove a boon for HSBC’s recently launched emerging manager programme as it is providing hedge fund managers across strategies such as long-short equity, distressed debt and trading funds.

“Several opportunities are arising from the Volcker rule. People are leaving the banks and launching their own funds,” Peter Rigg, head of HSBC’s alternative investment group told Reuters at a presentation in Zurich.

The Volcker rule, named after former Federal Reserve Chairman Paul Volcker, prohibits banks from trading with their own funds for profit, encouraging so-called proprietary traders to set up shop on their own.

U.S. regulators said on Wednesday they are unlikely to have the rule finalised by a July deadline, but many managers are still exiting banks ahead of when the ban is due to come into force.

Ex-Goldman Sachs stars like Pierre-Henri Flamand and Morgan Sze are among those to have already made the move.

Rigg said many managers perform best in the early years, when their funds are still small and they rely on strong returns to earn performance fees and draw in clients, rather than living off management fees levied on large asset bases.

He said HSBC’s $38 billion (23.8 billion pound) alternatives investment business can negotiate good fee discounts with these managers which it then passes on to its clients.

Rigg said HSBC’s funds of hedge funds were currently in “risk off” mode, meaning they are underweight strategies like long-short equities which rely more on market fundamentals than investor sentiment, while favouring strategies which look to profit from market trends, as well as smaller, nimble managers.

Tim Gascoigne, who was global head of portfolio management at HSBC Alternative Investments Limited, and who ran the $2.4 billion (1.5 billion pounds) GH fund of hedge funds left last month, after global banking group decided to merge its discretionary and advisory businesses.

Fund of funds are finding it increasingly tough to compete in an environment where investors are unwilling to pay an extra layer of fees. I happen to think that only the best funds of funds will survive the coming shakeout in the hedge fund industry, those that are able to add value in portfolio construction and identify new and existing talent.

And there are plenty of opportunities to seed emerging hedge funds. Bloomberg reports that Mike Stewart, who JPMorgan (JPM) Chase & Co. picked last year to oversee a unit of traders being moved out of its investment bank, has left to start a hedge fund.

Finally, Azam Ahmed of Dealbook wrote an excellent comment on Texas Teachers’ investment into Bridgewater. I quote the following:

If Bridgewater’s assets, and returns, continue to soar, the pension could do quite well. But if it has a string of bad years and investors withdraw their money, inflows could suffer.

“The investor has huge market risk,” said George J. Mazin, a partner at Dechert, a global law firm. “There have been a number of deals where investors bought high at the top of the market and in the next couple of years there was no growth and an attrition in assets.”

Such investments have been a mixed bag over the years.

Goldman Sachs, which started an in-house group to buy hedge fund stakes, has made some smart bets. Goldman’s Petershill fund bought a piece of Winton Capital in 2007 when the firm had less than $10 billion under management. Since then, its assets have swelled to nearly $29 billion, and performance has been strong, including a 6 percent return in 2011.

But Goldman has also had prominent losses. The Petershill fund bought a stake in Shumway Capital Partners not long before the firm’s founder decided to shut it down and return capital to investors. Another holding, Level Global Investors, was swept up in an insider trading investigation and decided to close shortly thereafter. Goldman lost big on its investment.

Morgan Stanley offers another cautionary tale. In 2006, it bought FrontPoint Partners, a hedge fund firm with $5.5 billion in assets. But soon, top managers started to leave. The relationship worsened when a FrontPoint manager was accused of insider trading in 2010.

In 2010, Morgan Stanley took a $193 million impairment charge related to FrontPoint. The bank sold its stake back to FrontPoint last year.

The deals can also prove treacherous for the hedge funds, as they try to navigate the relationships with their partners and their investors. An owner, like the Texas pension, may want fund assets to grow, because it means more money in hand. But an investor in the fund may want to keep a lid on the size, fearful that if the fund gets too large it will hurt performance.

I think Texas Teachers’ went overboard with this investment and time will prove me right. The landscape is changing in the hedge fund world. Investors fixated on the ‘old model’, chasing after the latest ‘superstar manager’, are going to be sorely disappointed. Those taking intelligent risks, changing without regret, will come out ahead.

Below, Bloomberg’s Dominic Chu reports that John Paulson lost 1.5 percent in February in one of his largest hedge funds, according to an investor update, paring this year’s gain and setting back efforts by the New York-based manager to recoup record losses in 2011. He speaks on Bloomberg Television’s “Inside Track.”

Also, Anita Nemes, Deutsche Bank AG’s London-based global head of capital introduction, talks about the outlook for the hedge-fund industry. Global hedge fund assets may rise 12 percent this year to a record $2.26 trillion as investors reduce cash and seek returns, according to an annual survey of investors by Deutsche Bank. Nemes speaks with Erik Schatzker and Stephanie Ruhle on Bloomberg Television’s “InsideTrack.”

Tags: Bank Of America, Billionaire, Composite Index, Credit Crisis, Forbes Reports, Fund Business, Hedge Fund Performance, Hedge Funds, Investment Advisor, John Paulson, Losing Faith, Massive Amounts, Merrill Lynch, Outflow, Rd Quarter, Redemptions, Terrible Year, Trimtabs, U S Stock Market, Vardi
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“Guru” Report Card: Grading the Picks of Top Pros Including Buffett, Tepper, Whitman and Hussman

Tuesday, February 22nd, 2011

Investors involved in the equity markets often pay close attention to which stocks the prominent fund managers in the market are buying and selling every quarter when 13F filings begin to roll in. These reports provide insight into how the brightest investing minds and most successful money managers are currently investing their money and shed light on any big bets being made by these “gurus”.
Today we will highlight the stocks these “Gurus” have either recently added to their portfolios as new holdings or stocks that they have recently increased their position in the last quarter and rate them using the Economic Margin Valuation model. Specifically, we will be taking the pros picks and giving them letter grades (A, B, C, D, F) based on our valuation model. In addition, we will provide a Grade Point Average for each of the experts list of top holdings along with the largest increased positions.

To gain access to our best stock picks and most extensive buy/sell lists, click here to sign up for our free weekly newsletter Investment Advisor Ideas.
In the next quarter, we will review the performance of these stocks that we have attached a letter grade to, and compare the performance of each group of stocks (A’s, B’s, C’s, D’s, and F’s) to find out how much value our analysis added. We hope that our insights will improve the performance of your portfolio by enabling you to view these companies through a different lens and help to identify firms likely to outperform as well as some potential torpedoes.
The charts below illustrate the top holdings and largest position increases from 7 of the top stock market “gurus” as well as a letter grade for each company based on how it ranks according to AFG’s valuation model.
First we will look at the companies that make up the largest percentage of these experts portfolio. Some of these positions may have been trimmed over the past quarter, however they are still a top holding within their portfolio.

Click Here, to view this entire report with top holdings and largest increased positions and how each company ranks according to our valuation model.

Tags: 13f Filings, Afg, Best Stock Picks, Buffett, Card Grading, Fund Managers, Grade Point Average, Guru Report, Hussman, Investment Advisor, Last Quarter, Letter Grades, Market Gurus, Money Managers, Position Increases, Shed Light, Stock Market, Tepper, Torpedoes, Valuation Model
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Common Sense from Marc Faber

Saturday, July 10th, 2010

This article is a guest contribution from Frank Holmes, U.S. Global Investors.

Dr. Marc Faber, the economist, investor and long-time member of the prestigious Barron’s Roundtable, offers up some good perspective on investing in his latest Monthly Market Commentary newsletter.

The title of the commentary is “One of the First Duties of the Investment Advisor is Educating the Masses not to Speculate,” and it’s worth grabbing out a few of his key points.

I feel that most investors take far too many risks – often with borrowed money – and fail to diversify sufficiently. They also have little patience, very short-term time horizons and no tolerance for losses. Finally, their expectations about investment returns are completely unrealistic… Most investors buy a stock or make an investment with the view that within a month the return should be between 10% and 20%.
A real return of around 4% per annum is about what an investor (exclusive of costs, and without making the mistake to buy “high” and sell “low”) could expect to achieve over longer periods of time… If you can achieve an annual average real return of just 3% on all your assets (inflation adjusted), you will leave a huge fortune to your children.
For the average investor like myself, I prefer diversification and no leverage. I have seen time and again investors (including myself) be right about an asset class’ future performance but fail to convert those views into any capital gains… All I wish to say to my readers who are not managing risk on a daily basis is that the prime consideration should always be capital preservation and avoiding large losses.

Behavioral finance research has identified many emotion-driven tendencies of investors that lead to suboptimal returns – overconfidence, chasing the herd, holding onto investments too long or holding onto them not long enough, and many more.

Marc’s points above are common-sense basics that investors should be reminded of every so often to help them make better long-term decisions.

Tags: Barron, Behavioral Finance, Capital Gains, Capital Preservation, Daily Basis, Diversification, Dr Marc Faber, Finance Research, Frank Holmes, Investment Advisor, Investment Returns, Managing Risk, Market Commentary, Prime Consideration, Roundtable, Sense Basics, Term Time, Time Horizons, Time Member, U S Global Investors
Posted in Markets | 1 Comment »

Face-to face with the bears: Marc Faber and Mish Shedlock

Monday, March 15th, 2010

In the three-part interview below, Aaron Task and Henry Blodget of Yahoo Finance – Tech Ticker interview Marck Faber, publisher of the Gloom, Boom and Doom Report, and Mish Shedlock, investment advisor at Sitka Pacific Capital and author of the economics blog, Mish’s Global Economic Trend Analysis. They discuss, among others, the economic outlook, inflation vs deflation, and the prospects for stock markets.

These are admittedly two of the most bearish commentators around, but well worth listening to.

Part 1: Economic outlook

Source: Yahoo Finance – Tech Ticker, March 12, 2010.

Part 2: Inflation vs deflation

Source: Yahoo Finance – Tech Ticker, March 12, 2010.

Part 3: Prospects for stock markets

Source: Yahoo Finance – Tech Ticker, March 12, 2010.

Tags: Advertisement, Bears, Boom, Commentators, Deflation, Doom, Economic Outlook, Economic Trend, Economics, Face To Face, Gloom Boom And Doom Report, Henry Blodget, inflation, Investment Advisor, Marc Faber, Marck, Prospects, Stock Markets, Trend Analysis, Yahoo Finance
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The carry trade is now in trouble…

Wednesday, December 9th, 2009

The following is a guest contribution by Yves Lamoureux, Investment Advisor, Macquarie Private Wealth, Inc.

I don’t share the recent stock optimism as the tail is wagging the dog. The higher the stock index goes the greater the number of bulls and the greater the amount of decimated bears. Those burned bears will not be adding to the buy side at lower prices to cover shorts. See chart courtesy Market Harmonics). Good news about this will also turn out to be bad when the party is up.

The party by the way is almost up. The not-so-smart money of 2008 might be getting its mojo back. If the commercials are getting it right in the futures market then they might as well be calling the top of many markets.

One huge problem is that the bulk of the long side is now carried by speculators with cheap money. A simple rule of Wall Street where bulls die from their own weight may apply right here. Its all about mechanics rather than economics and becomes self-reinforcing. That’s been my point throughout 2007. Perhaps an early call but the right one nevertheless. We have come full circle once again. Leverage has been put back on as if nothing ever happened. I have underestimated the great desire of participants for suicidal tendencies. The cracks start to appear in select markets first. We have observed a number of those already. We did fire our first gold warning recently even though we have been long term bulls.

The second warning concerns the Japanese currency. I show a timing model based on expansion/contraction of the Japanese monetary aggregates. The recent stimulus from Tokyo is too small to make a large contribution to things. However it is relevant to us because money is already expanding and just might act to depreciate the yen at a faster rate.

You can see here another version of the same timing model showing the recent bump up in monetary aggregates. I have been a very long-term bull on the yen. If relative money expands in Japan while American money contracts then you have us bullish on the USD to come.

I have studied the behavior of commercials in the futures market for a long time. They usually have a success rate of over 8/10. The year of 2008 was not so gracious to the not looking so smart anymore crowd. The commercials would appear to have gotten their mojo back. They are relatively short in big ways in too many markets. For that reason alone it bears watching as this is a significant development.

The carry trade as a barometer of things to come will show the unwind at the early stage. From my perspective it is here & now that the carry trade ends.

Yves Lamoureux, Investment Advisor, Macquarie Private Wealth, Inc.

The opinions contained in this report are those of the author and are not necessarily those of Macquarie Private Wealth Inc.. Every effort has been made to ensure that the contents of this document have been compiled or derived from sources believed to be reliable and contains information and opinions which are accurate and complete. However, neither the author nor Macquarie Private Wealth, inc., makes any representation or warranty, expressed or implied, in respect thereof, or takes any responsibility for any errors or omissions which may be contained herein or accepts any liability whatsoever for any loss arising from any use of or reliance on this report or its contents.

Hat tip: ZeroHedge

Tags: American Money, Blackmont Capital, Canadian Market, Carry Trade, Cheap Money, Contraction, Futures Market, Gold, Great Desire, Investment Advisor, Japanese Currency, Lamoureux, Mojo, Monetary Aggregates, Money Contract, Optimism, Private Wealth, Second Warning, Smart Money, Speculators, Stimulus, Stock Index, Suicidal Tendencies, Timing Model, Wh, Yen
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Tom Stanley’s Investment Philosophy

Thursday, December 18th, 2008

Tom Stanley, founder of Resolute Funds, has earned a stellar reputation as one of North America’s greatest investors. This year has not been kind to investors in Canada and as of the end of November, it certainly was not kind to Tom Stanley either. But then, its been no one’s equity market, except if you’ve been short. For value investors and contrarians, the problem has been that stocks that were deemed to be cheap during last summer, have become cheaper, and much quicker too than anticipated, as equity market liquidation continued and as economic fundamentals deteriorated both in Canada and globally. It is discipline, however, that sets the best asset managers apart from the crowd, and Tom Stanley is perhaps one of the best there is.

We would like to share his investment philosophy with you. We have gratuitously taken the following information from the Resolute Funds website.

About Tom Stanley: After earning his undergraduate degree in Psychology at the University of Western Ontario, Tom Stanley completed his Master of Business Administration at York University. Tom entered the investment industry in 1980 and served as an Investment Advisor for “regular people”. He put a strong emphasis on educating the public on good investing practices. To this end, he taught investing at Ryerson University, Seneca College and at neighborhood YMCAs. He was also producer, host and moderator of the TV show “Your Business”.

In 1989, Tom became a Portfolio Manager and subsequently founded the Resolute Growth Fund in 1993. He continued serving as an Investment Advisor until 2004 when he retired from this position to focus solely on fund management. His twelve and a half years of managing the Resolute Growth Fund came to an end in 2006, when Tom made the difficult decision to terminate the Fund. At its last month end, Resolute Growth Fund enjoyed the best ten-year performance track record in North America for all funds tracked by Globefund & Morningstar. Tom currently oversees the Resolute Performance Fund, a private mutual fund sold by offering memorandum founded in 2005.

Here as published by Tom Stanley, are Tom Stanley’s ideals about investing:

There are many ways to be a successful investor. I have no claim that what has worked for me in the past will continue to work in the future, but I would like to share with you some of the principles I have learned over the past 25 years that have helped me become a better investor.

1. Be a Long Term Investor
Too much emphasis is placed on short-term fluctuations. It is easier to anticipate long-term trends.

2. Have a Flexible Approach
Change is the only certainty and as markets change, one should change as well.

3. Actively Look for Ideas
I find many of my best ideas; they don’t find me.

4. Be Skeptical
Check facts directly. Strive to understand the bias and potential conflicts of interest among the sources that provide them.

5. I Eat my Own Cooking
My only stock market investment is the Resolute Performance Fund. This aligns my interests with the rest of the unitholders.

6. I Buy my Best Ideas
I prefer to buy only my best ideas.

7. Filter out the Noise
One of the greatest challenges is to filter out the noise and use only what is relevant.

8. Be Thrifty
Moderate costs facilitate moderate fees. Moderate fees facilitate performance.

9. Outperform by Being Different
To have a chance of outperforming the market, invest differently than the market.

10. Know Your Limits
It is just as important for me to know what I don’t know as it is to know what I know.

11. Stay Humble
Stay humble or the market will make you humble.

12. Being Small is an Advantage
It is easier to outperform being small.

13. Apply Spiritual Principles
An important measure of one’s success is how much he benefited his fellow man.

14. Investing is Not a Team Sport
The best decisions are rarely made by committee.

15. A Good Card Player Does Not Show His Hand
Confidentiality is essential for successful small cap investing.

16. Too Much Emphasis is Placed on Precision
I don’t need exact numbers to make decisions.

17. Be a Contrarian
Being a contrarian is harder in practice than in theory.

18. Strive for Effective Rationality
Do the homework; know the facts; and make decisions based on the facts.

Here are some more of Tom Stanley’s thoughts on investment management:

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