True. And yet the world of investing (I'm not talking about market makers etc) is filled with funds whose composition is determined by everything except simply buying predictable cash flows for cheap, wherever you can find them.
I completely disagree.
You have to judge the (long term) investment in full context of the market, i.e. what other people are thinking about it, regulatory climate, geopolitical issues, taxation, position in the value chain, status of customers/suppliers etc..
And for some strategies - none of it is relevant. If you can make trades 0.1 seconds faster than anyone else, the nature of the approach will be such that you don't care anything about the company other than where it's price is now - and where it will probably be 0.1 seconds from now.
* stays away from stuff everyone else is talking about --> the big hits only come from things that everyone eventually 'talks about'. So you must be aware of this dynamic. You don't want to ignore the herd - you want to be just ahead of it. Ergo - you have to understand herd dynamics.
* stays away from hedging - 'hedging' is still used often, and it's an important part of risk mitigation and execution strategy. Anyone that ignores herding is ignoring an essential tool that they can use
* stays away from diversification - same as previous: financial diversification is another essential tool.
* arbitrary limitations - no investor makes 'arbitrary' decisions. They stay away from certain sectors for a reason: they don't understand it, it's risky, there are geopolitical issues they can't control etc.
* tries to keep costs down - uh ... keeping costs down is what every company should aspire to do. In fact - if a fund can get rid of 1/2 it's staff through automation, well, you could make more money depending on how the fees are structured
* doesn't worry about volatility - no - you definitely want them to worry about volatility as it's an essential financial characteristic of the market and means a lot. If your strategy is to invest in cheap blue-chips that pay nice dividends because other investors are not paying attention ... well, volatility is bad.
Here's the key: Investing is not really investing. It's mostly gambling - in the sense that it's a zero-sum game, played against other players. It's more like poker.
You don't win at poker just by playing smart cards. You win at poker by understanding other players predictable behaviour, ie understanding the market, as it is driven by other players.
Though markets do grow and there are some 'bonus surpluses' for everyone, most firms do not win off this - they can only win if someone else loses.
* Dealing with risk: hedging and diversification are expensive in more than 1 way. An investor can manage risk with cruder and cheaper means. E.g. by taking out the original investment after the first ~100% in capital gains. Or quickly cutting companies that start violating your initial criteria. Or limiting yourself to trampled paper that hides a beautiful earning machine. Or most important of all: doing nothing in case you can’t find that kind of trampled paper.
* Wrt risk: I guess periodically holding a huge war chest of cash is the only “diversification” I can approve of.
* Many funds and portfolios are built around arbitrary criteria. By which I mean any criteria that have nothing to do with predictability of earnings and low prices for each individual position (when talking about stocks).
* Volatility is irrelevant. Actually, if you have the tiniest bit of patience and a decent stomach, volatility is awesome. I’m happy if I can pay $1 dollar for a well run company that makes 0.25 dollars in yearly profits. I’m happier if it’s an illiquid company and one beautiful day my fishing order for $0.75 dollars gets filled. Often, companies are more volatile when they’re down, so I even feel confident to say that volatility can do wonders for your performance.
I don’t think proper investing is anything like gambling and I’m pretty sure you’re not playing a zero sum game.
Trading on the other hand is a zero sum game. That’s one reason to not be bullish on any given guy who trades without working for Rentec & co.
* "Especially stay away from “tips”." Ha. My friend - most of the big earnings are made from tips. Financial markets are awash in near-insider trading. It's totally institutionalized. "Tips" are how some of the biggest funds make 100% of their money. Do you honestly think these people are better investors? They pay 'consultants' to talk and try to glean info or they're just passed tips directly.
* There are very well established mathematical mechanisms for proper hedging, diversification and risk management. Most stocks are correlated with other stocks, usually in the same sector. There are mechanisms to evaluate correlations across a portfolio and find inversely correlated stocks to properly hedge. It has nothing to do with those companies, usually sectors.
* "Actually, if you have the tiniest bit of patience and a decent stomach, volatility is awesome" - this is your, personal investment approach. It has nothing to do with what funds may or may not do WRT to volatility. You missed my point: some funds will pay a heavy price for more volatility in the market, given their strategy. So volatility is pretty important and relevant to any strategy.
* "I don’t think proper investing is anything like gambling and I’m pretty sure you’re not playing a zero sum game."
Yes - investing is gambling. There is only about 1% GDP growth in the US economy in a given year. This means there are very little surpluses to be spread out. If funds could only fight for those surpluses, then nobody would be getting amazing returns, and most funds would get 0% return. Ergo - it's mostly a zero-sum game. Meaning - your winnings come from others loses. Meaning: it's poker - and strategies mostly involve understanding how other people invest.
Do you know the saying - when you look around the poker table if you don't see the 'mark' - then the 'mark' is you? You are playing against people who have access to inside information, better research, better trading tools, and tons of staff. Do you think you're going to beat them?
Almost every retail investor is a 'mark'. They are giving their money to the hedge funds. The same can almost also be said for larger funds, often lazily managed.
* Please do pay for the advice of experts and consultants. I'm sure there's a couple of useful ones amongst the subgroup who don’t speak in riddles and who put their own money where their mouth is.
* Please do engage in hedging and diversification to manage risk. Can’t spend enough on safety! I mean, what else can you do if you’re not sufficiently convinced that some company is super cheap vs earnings?
* Please do spend lots of time and money dwelling on volatility. Hey maybe it will reduce your risk!
* Oooh the “mark at the poker table” thing. Very hedge fundy.
Truth is, I constantly feel like the mark. Like everybody is out to get me. I've considered legally changing my name to Mark but I'm Dutch so it doesn't make much sense.
I feel like a mark with most management teams whose companies I’m looking at. I feel like a mark when people try to overcharge me on the market. I especially feel like a mark when financial services people offer me better research and better trading tools. Since ~2003 I’ve been afraid the entire planet has become a mark for finance.
The good thing is, when I feel like a mark, I don't act. I've never felt like a mark more often than today.
Anyways, if you think we're sitting on the same table, come and get my money. I from my side think you're just 20 years late to your table.
Good luck hedging dude! Being a self admitted gambler, you’ll need it.
Your points regarding what hedge funds should do or not are simply wrong.
I don't invest, I leave that to professionals.
Also - you might want to take a course in investing finance. You'll find it very interesting.
Ok so when giving people advice and talking about courses and backgrounds, at least you have experience with investing or trading in the past?
Or just the courses?
If your going to try and predict human behavior your better off using that when buying stock. AKA if you know the iPhone is going to win then buy Apple. Or if you bought Dell at IPO that's 500x returns over 12 years.
* stays away from the pressure to be "with it" every quarter
* stays away from stuff that everyone is talking about
* stays away from short term thinking (like real time datasets)
* stays away from statistical artefacts and spurious relations (aka “huge amounts of data”)
* stays away from stuff where they don't understand the basic business models
* stays away from stuff that is built on promises
* stays away from mostly all hedging, other than paying the proverbial 50c for a dollar
* stays away from diversification "just because" (looks at each individual investment on its own merits)
* stays away from arbitrary limitations on asset types or sectors
* stays away from short selling (or situations where you can loose more than what you put in)
* stays away from giving or taking tips on individual investments
* even stays away from feeling they have to kick ass every quarter (if you just can't find anything good... do nothing)
* instead just focuses on not loosing big quantities of his/her own money
* tries to keep costs down (less data, less trading, no hedging, low fees, less dealing with currency exchange)
* doesn't worry about volatility or even enjoys it
* has a few large winners and then some smaller potential winners
That may exclude most if not all funds, hedged or otherwise.
Also: in my experience every 19 year old and his dog now tend to consider themselves "macro traders". It’s an indication of how extremely financialized the entire world has become since the 80s. That in itself bodes ill for the 2 and 20 crowd.