Star Trek (Next Gen): Jean-Luc Picard
A growing number of folks are becoming aware that the performance of most mutual fund managers over an extended period does not exceed that of benchmark indexes such as the S&P 500. More specifically, 99.6% of all mutual fund managers failed to beat (i.e., only 71 funds out of 17,785 matched or beat) the performance of the S&P, net of fees, over a ten year period according to data compiled from the Mutual Fund Screener of The Wall Street Journal. Please reference the entire article titled “Wall Street Is a Rentier Rip-Off: Index Funds Beat 99.6% of Managers Over Ten Years
” at the blog Of Two Minds
Talented investors are often not managing formal, traditional funds but rather managing one’s own accounts or a small number of accounts (e.g., friends and family). These individuals are more likely to fit the mold of idiosyncratic entrepreneurs or founders of technology start-ups.
Nevertheless, one of several takeaways is “don’t judge a book by its cover.” In other words, just because a money manager is nicely dressed, displays stereotypical good credentials, and has friends in high places (partly enables said manager to either procure capital or secure the fund management role), shouldn’t imply an above average talent for investing. One can present a similar case against most (not all, of course) hedge fund and venture capital fund managers, as highlighted in two Zero Hedge
articles titled “Most Hedge Funds Underperforming The S&P 500 For Fifth Year In A Row - Full YTD Performance
” and “Venture C(r)apital: Myth And Reality
Yuan Dynasty Banknotes (circa 14th century)
Let's end the year with some humor from The Daily Capitalist and its recent post titled “Top Ten Reasons Why Fiat Currency
Is Superior To Gold (Or Silver) Money.”
The Top 10 Reasons are below; the commentary can be found at The Daily Capitalist
Number 10: There Is Not Enough Gold (Or Silver) In The World To Serve As Money
Number 9: Gold And Silver Are Old-Fashioned, Cumbersome Money
Number 8: Gold Restrains Growth
Number 7: The Gold Standard Caused The Great Depression
Number 6: Rules Can Be Broken
Number 5: Gold-Backed Money Favours The US Versus The Rest Of The World
Number 4: Gold Favours Gold-Mining Countries Over Others
Number 3: Gold Favours The Rich
Number 2: PhDs Know What’s Good For Us
Number 1: If Given A Choice, We Would All Prefer Fiat Over Gold-Backed Money
SecondMarket provides a timeline of trades
in Facebook (FB)'s common stock since April 2008. If one applies a discount (let’s use 30% for example purposes) to account for a limited supply of shares available via SecondMarket versus a larger supply of shares otherwise available in a publicly traded market, then one could derive a "fair" value of FB in a public market (note 1).
Further, SecondMarket data from 2012 along with a January 2012 tiny venture capital round
(only $9.6 million at about $31 per share) seem to have been used and publicized to anchor in a price and valuation to justify the targeted IPO price range. Accordingly, it would be reasonable to consider this data as less reliable and an outlier.
So, using data from the last half or last quarter of 2011 would provide a reasonable benchmark share price in which to apply a discount (or a discount range). A back-of-the-envelope calculation indicates a share price on SecondMarket that averaged about $32. Applying a conservative 30% discount indicates a “fair” share price of roughly $22 if supply were not as constrained as it was on SecondMarket. Given this assessment, the investment bankers apparently earned their commission since they priced the IPO at a 72% premium to the adjusted share price calculated using SecondMarket data.
Our opinion is even at $22 per share, which implies a market capitalization of $60 billion (note 2), FB is considerably “overvalued," especially in light of the most highly valued companies depicted in the chart below and highlighted on InvestmentNews by Mark Bruno
Regardless, to incorporate a downside valuation range, one might want to further consider the picture highlighted in the upper left above from a ZeroHedge blog title "PeakBook?
" that compares search volume between Facebook and Myspace. Or, read a post at Forbes by Mark Evans titled "Warning: Stay Away From The Facebook IPO.
(1) Securities and Exchange Commission. 424(b)(4) Prospectus
filing dated 17 May 2012. . Total Class A and Class B shares being offered
in the IPO is 421,233,615 or about 20% of actual common shares outstanding as of 31 March 2012 of 2,138,085,037 and 15% of adjusted common shares outstanding after the IPO of 2,741,527,754.
(2) Total Class A and Class B common stock to be outstanding after initial public offering: 2,741,527,754 multiplied by the calculated common stock price per share of $22.
The folks at Pragmatic Capitalism (PragCap) posted a blog today by Walter Kurtz titled “Time to Stop Fearing the Greek CDS Bogeyman.
” The article essentially presents an argument that the market shouldn’t be overly concerned about a potential significant payout by writers – banks, insurance companies – of credit default swaps (CDS) on Greek sovereign debt.
Part of this topic relates to Greek lawmakers wanting to retroactively change the existing Greek-law bond agreements
by including a collective action clause (CAC
) that would enable a supermajority
of bondholders to force a debt restructuring on all holders. S&P wrote that it would consider this amendment an action of default
, hence triggering a default and a CDS payout.
PragCap includes some useful charts from SoberLook.com
and outlines four points regarding why a CDS trigger would not be a concern. The first and last points relate to CDS being marked to market.
This argument may be valid if most or all of the CDS written were done so prior to mid-2010 when laws were imposed for writers of derivatives contracts to post collateral. However, these laws were not
imposed retroactively. We can thank Warren Buffett, as he lobbied Congress
in 2009 and 2010 against making this law retroactive, which is fair (unlike the CAC insertion mentioned above). Note, however, at the time Berkshire Hathaway had $63B+ of derivatives contracts of which it was at risk of being asked to provide collateral of between 10% and 20% of the total amount, or roughly $7B to $14B of collateral. Nevertheless, since the law is not retroactive, Berkshire doesn’t have to post collateral for these contracts, which are mostly index derivatives, incidentally.
Our sense is that a lot of the outstanding Greek sovereign debt CDS were written prior to the collateral posting requirements. Ergo, the writers of said CDS – banks, insurance companies – have not posted collateral, just like Berkshire Hathaway has not posted collateral for its derivatives written prior to the change in rules.
We shall see…
It's easy to beat "sophisticated" investors
- Amazon.com is experiencing shrinking margins, increased R&D expenses, and decreased efficiency. Can anyone say Layoffs and Stock Price Haircut?
- Remember Whitney Tilson? He went short Netflix when the stock exploded higher. Now, Tilson explains why he went long Netflix as it continues to behave like a falling knife. He insists he "Hasn't Lost His Mind."
- Again, most (let's say 98%) of professional investors such as mutual, hedge, venture, private equity, and institutional (pension, endowment, etc.) fund managers are effectively incompetent. They prefer the euphemism of “having a bout of negative alpha,” by the way. Monkeys need to be given more consideration, apparently.
- Jon Stewart's extended interview with the GOP candidate who is often ignored by mass media. You know, Ron Paul, the guy with a credible plan.
- Are Californians or New Yorkers happier? That’s just one of the questions cognitive psychologist Kahneman addresses in his new book, “Thinking, Fast and Slow.”
- It makes one curious why the Occupy Wall Street movement doesn’t have a laser focus on two institutions: the FED and the Congress. The snickering from abroad you hear are from the youth of Cairo, Tehran, Athens, and other places. Here’s one former hedge fund manager’s perspective on the movement (in San Francisco).
- Piggybacking on the trades of activist investors is not without peril. According to AlphaClone, here are the average annual returns one would have generated by cloning the portfolios of a few better known managers such as Barry Rosenstein’s Jana Partners (13.5%), Daniel Loeb’s Third Point (8.9%), and Bill Ackman’s Pershing Square (4.3%). Not impressive.
Cerberus by William Blake (1757-1827)
According to Coller Capital, and highlighted by Jason Kelly at Bloomberg
, investors’ newfound selectivity will help eliminate 20% of private equity firms. Just one of many reasons is alluded to by the June 13, 2011 bankruptcy filing by Perkins
and Marie Callender's restaurant, a portfolio company of Castle Harlan, which will lose all of its $245 million investment.
This isn't new information or surprising to many deal-by-deal practitioners such as Coventry League, as we witness the level of talent (or lack thereof) on a continual basis (in public and private equity investing) and wrote about the upcoming debt overhang at over-levered portfolio companies (De-leveraged Buyouts; Nov. 2009
). Nevertheless, more transparency about these zombie-like private equity firms is positive for the industry since many of these below average firms and professionals tend to overbid and under-perform from a post-acquisition operating perspective.
Unfortunately, the investment and M&A industry is not like, say, professional sports. In sports, athletes are continually evaluated mostly on an objective basis and are displaced by those who demonstrate better prospects and abilities. Exceptions, to an extent, are made for legacy athletes (e.g., Brett Favre) – sometimes. In investing, especially at firms that don’t charge fees based on performance (think wealth management-type firms and mutual funds), many professionals exist not necessarily by their objective abilities and performance but rather mostly by subjective reasons that often include cosmetic aspects of one’s background, personal connections and whatnot.
Additionally, the industry perpetuates a myth that it is practically impossible to consistently outperform market indices (read: collection of companies selected by preset screens) using similar risk (typically defined using price fluctuations with time horizons less than a year).
Why apparently sophisticated investors, including high net-worth individuals and institutional investors continue to deploy capital irresponsibly is puzzling. This is best addressed in a separate blog; however, we'll leave you with this: InkStop. It was a retail chain outlet focused on selling ink cartridges for printers. The business model was terrible (high fixed costs; low-priced products; market trend of low-cost, quick-delivery Internet options; etc.). Yet, several "sophisticated" investors found this business model attractive enough to actually request an investment memorandum and subsequently invest in the company. After the company's prompt fall to bankruptcy, some of these same investors amazingly cried foul
. Moral of the story: Stupid is as stupid does.
Map of Journey to Hades
Against the wishes of global banks and investors, but with the wishes of its citizens, Iceland allowed its too-big-to-fail institutions to default (i.e., no taxpayer-funded bailouts).
A Great Depression in Iceland didn’t occur.
Rather, its economy has stabilized
and is performing well, relatively speaking.
Elsewhere, in contrast, leaders have been using fear-mongering and outright threats
(if citizens don’t enable massive bailouts, then the equivalent of financial Armageddon will happen).
The latter is disturbing because leaders are essentially saying if citizens don’t permit bailouts, then civil-servant leaders will make things worse than otherwise (drastically reduce public pensions, services, etc.).
If these were company managers, their actions would be considered fraud by a rational Board of Directors and promptly removed from service.
A good example of the aforementioned fraud and potential fraud on citizens can be gleaned from what is happening in Greece.
In short, Greece needs to restructure its debt; in other words, it needs to default.
However, global banks and investors (take your pick) that speculated in credit default swaps, and international institutions (IMF, central banks) intend to do whatever it takes to prevent Greece from formally defaulting. The most recent ploy is to frame a default as a “voluntary exchange;” doing so is deemed to not trigger a payout by the sellers of CDS.
However, a sovereign nation has no reason to play semantics with how it defaults, and is not beholden to sellers of CDS…unless there are implied threats against the country for doing what is best for its citizens.
So, as indicated in the blog by Automatic Earth titled “Honey, I Swapped the Greeks
,” the concern is not with Greece defaulting and reducing the principal due to bondholders.
Instead, the concern is with the huge payouts that would be required by CDS sellers (think insurance companies and banks; hedge funds; holding companies like Berkshire Hathaway; et al.)…and the money is not there to payout.
Total Greek bond notional CDS: $5.4B
Total Greek bond market: $374B
Total Greek CDS market: $455B (ergo the problem with a formal default)
And, if Greece proceeds to formally default and not engage in semantics, then one can estimate the carnage from contagion of CDS payouts as defaults spread to larger sovereign nations that are in similar financial straits…
Source: Bloomberg* Current as of 16 June 2011 1 euro = 1.4165 US dollars
UPDATE: 20 June 2011. (*) Note: Bloomberg's values in chart, and figures highlighted in article do not sync. It appears one of the sources does not use the appropriate currency. The magnitude, ratios and schedule are apparent regardless.
Map of Seattle by Lonely Planet
Below is a mini-curation of a few interesting articles addressing Barriers to Entry, Shorting Restaurant Chains, Keynesians, and our Emerald City - Seattle:
- Durden, Tyler . "The Next Big Short: Restaurant Chains." zero hedge | on a long enough timeline, the survival rate for everyone drops to zero. Web. 8 Mar. 2011. <http://www.zerohedge.com/article/next-big-short-restaurant-chains>. Union Bank of Switzerland (UBS)'s Andy Lees on why restaurant stocks are about to get crushed...again.
- GLAESER, EDWARD L.. "How Seattle Transformed Itself." The Economy and the Economics of Everyday Life - Economix Blog - NYTimes.com. Web. 8 Mar. 2011. <http://economix.blogs.nytimes.com/2011/03/08/how-seattle-transformed-itself/>. The Harvard professor discusses the success of Seattle.
- Rahn, Richard. "RAHN: Incorrigible Keynesians." Washington Times - Politics, Breaking News, US and World News. Web. 7 Mar. 2011. <http://www.washingtontimes.com/news/2011/mar/7/incorrigible-keynesians/#>. Article addresses some of the irresponsible practitioners of the Keynesian orthodoxy.
Warren Buffett, Penn, 1948
Say it ain't so, but has the much-admired Berkshire Hathaway engaged in financial shenanigans? If so, many will be crestfallen.
Apparently, instead of adhering to accepted SEC guidelines concerning marking down long term assets to their objective market values, Buffett’s Berkshire Hathaway decided to mark its assets to wishes
, not unlike some other notorious institutions including Enron and zombie banks (not all banks, of course).
Accordingly, here are two articles by the irreverent Zero Hedge highlighting the aforementioned Generally Unaccepted Accounting Principles
(GUAP): Berkshire Takes Accounting Rules Into Its Own Hands, Tells SEC To Stuff It
“A new just released stunner discloses the unprecedented level of hypocrisy attained by Warren Buffett, for whom apparently accounting rules are swell, except when he actually needs to follow them.
” Full Text Of Berkshire Letter Deciding To Override SEC Accounting Policies "We eagerly await Ms. Becky Quick's reporting on this latest development.”
And, here is a link
referencing an article by Michael Lewis titled “The Temptation of St. Warren.
As one commenter stated, quite harshly and disrespectfully in our opinion, “Buffett was a crook as a youth; is he now being revealed as a crook at the end of his career, too?” Nevertheless, regardless of one's perspective, that kind of rhetoric is crossing the line of civilized discourse.