Do Bear-Market Veterans Manage Better in a Downturn?
Bridget B. Hughes, CFA
Thursday March 12, 2009, 7:00 am EDT
As the markets continue to crumble, many mutual fund managers are scratching their heads. They say the markets aren't recognizing some companies' good fundamentals, including resilient earnings figures, strong balance sheets, and stable cash flows; and, they say, it's simply fear that has gripped all corners of the market. In coming to grips with their own funds' performance, many note that the current stock market environment is unprecedented in our professional lifetimes (unless, of course, you are 100 years old and worked during the crash of 1929).
Technically, those managers are right in at least one regard: The S&P 500 Index has fallen nearly 55% since Oct. 9, 2007--an outcome worse than that of any other bear market since 1929 (when the Dow Jones Industrial Average plummeted more than 80% in less than three years). But there have been some periods with results similarly gnarly to the most recent drop, including the bear market that began in January 1973, which ultimately saw the S&P 500 fall nearly 50%. Granted, there were some other differences back then, including higher inflation and a drawn-out decline. (It's been faster this time around.)
Still, we wondered if funds led by portfolio managers that ran money in the 1970s have been better off in the latest downturn. There aren't many managers that have run the same mutual fund for that long (though more have been investing that long) and some that have are part of a team of managers on those funds. Below is a table showing which stock funds have the longest-tenured managers and some details on some of the best-known offerings.
Franklin Growth (NASDAQ:FKGRX - News)
Jerry Palmieri started on this fund in the mid-1960s. During the bear market that began in 1973, the fund lost nearly 48%--about in line with the rest of the market. But since then the fund has generally held up much better than the market in tough times. In 1987's quick drop, Palmieri kept the fund's losses to less than 20% between late August and early December. (The market dropped 33% during that period.) In 1987, Morningstar named Palmieri its first Manager of the Year, as he led the fund to a near-20% gain. One of Palmieri's tricks over the years has been to build cash, with varying degrees of success, but somewhat surprisingly, that's not what's helped the fund since late 2007. Rather, Palmieri's approach has kept him largely out of financial stocks and energy names--two areas that have been particularly hard-hit lately.
Nicholas (NASDAQ:NICSX - News)
Manager Ab Nicholas, who started his investment firm in 1967 with Dick Strong, has been running this fund since its inception two years later. During the 1970s bear market, this fund was burned badly, losing more than 70% of its value. Given that monstrous setback, it's no surprise that the fund has since been characterized by its defensive attributes. (Plus, Strong, whose investment philosophy was more growth-oriented, left Nicholas in 1972 and started his own firm in 1974.) While Nicholas Fund has proved to be a steady-Eddie--with less volatility, a lack of technology stocks, and an emphasis on valuations--it hasn't generated compelling returns over the long haul.
American Funds American Mutual (NASDAQ:AMRMX - News)
James Dunton has been part of this portfolio's management since 1971. Because each of the American Funds is run as a collection of independently run subportfolios, it's tougher to gauge the impact of just one of its managers on the overall portfolio. But all of the American Funds are characterized by a moderate strategy, with a contrarian streak, a sensitivity to valuations, and a customary stash of cash. In the 1970s bear market, the fund kept its loss to less than 33%, and the fund has continued to be a stable offering with good bear-market performance. With a limited stake in high-flying technology and telecom stocks, for example, it admirably lost less than 8% between early 2000 and late 2002. More recently, its regular bond stake and very limited investments in financials have worked to its advantage. Meanwhile, it has been a strong long-term performer.
Royce Pennsylvania Mutual (NASDAQ:PENNX - News)
This small-cap fund lost nearly 73% of its value in the 1973-74 bear market, though to be fair, manager Chuck Royce took over the fund two months after the decline began. It's thus no surprise that Royce has since regularly touted the benefits of a diverse portfolio and emphasis on valuations; these days, capital preservation and finding a way to buy lower-risk small caps are definite priorities.
Dodge & Cox Stock (NASDAQ:DODGX - News)
John Gunn's tenure on Dodge & Cox Stock begins after the 1973-74 bear market ended--he started on the fund in 1977--but Gunn was hired in 1972, so he experienced the drubbing while at the firm. Also, as the firm's chairman and chief executive officer, Gunn is part of a collaborative group of investment professionals, so it's tough to say how large an impact he has on the portfolio. As at the American Funds, though, Dodge & Cox's patient, against-the-grain investment approach had tended to keep its performance moderate, and it performed exceptionally well during the early 2000s bear market, when it lost less than 3%. In this latest downturn, however, several ugly financial stocks changed the story here.
Bridget B. Hughes, CFA does not own shares in any of the securities mentioned above.
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http://finance.yahoo.com/news/Do-BearMarket-Veterans-Manage-ms-14614245.html?.&.pf=retirement
Comment:
Showing posts with label fooled by randomness. Show all posts
Showing posts with label fooled by randomness. Show all posts
Saturday, 14 March 2009
Thursday, 19 February 2009
Fooled by randomness - The hidden role of chance in the markets and in life
'Fooled by randomness'
reviewed by Mark Wainwright
Fooled by randomness - The hidden role of chance in the markets and in life
If you watch a steam engine, you may not know how it works but you can soon get a fairly good idea of its behaviour, and you can predict its future behaviour accurately. Even though you don't understand its workings, you can see it's a pretty simple machine, so you can trust it to behave in a simple way: you have confidence in your predictions based on a short sample of its behaviour.
Most things in life are not like steam engines, but people treat them as if they were. Life in general, and markets in particular, involve large random factors, have complicated stochastic structures, and regularly spring nasty surprises. Their behaviour over short timespans may have so little significance as to be nothing but noise. Extrapolation is impossible or meaningless. Yet try as we might, we continue to see patterns where none exist, misunderstand the role of randomness, seek explanations for chance phenomena, and believe that we know more about the future than we do. And that is the point of this book.
Nassim Nicholas Taleb is a market trader and a professional skeptic. He claims mathematical naivety, but he is clear on one thing: the importance of understanding the structure of random events, their significance and, especially, insignificance. He clearly sees that this understanding is more important than actual calculations: "Mathematics is principally a tool to meditate, rather than to compute". He has seen innumerable traders go to the wall - "blow up", in the picturesque jargon of the trade - when a seemingly successful career is brought to a spectacular end by some "unexpected" market collapse. "No-one could have predicted that", they say, sadly shaking their heads as they leave the trading floor. They have been fooled by randomness.
There are many ways of being the fool of randomness. One, as here, is to fail to predict the rare event. Nothing can be more certain than that the unexpected will happen sooner or later, but lulled into a sense of security by the periods of relative calm between, people forget to allow for it. Another is to see significance in some random pattern. Taleb explains with crystal clarity why the more often you look at some fluctuating quantity (the value of your share portfolio, for example), the less meaning your observations have. Yet he sees traders who watch prices move up and down in real time on screen - the changes are so small as to be completely random - and think they are learning something.
Another, more insidious, is the "survivorship bias": in a random population, some items will be more visible than others. Say we have a collection of traders whose strategies do no better than random: they will have a good year half the time, a bad year the other half. Half of them will have a good year. A quarter will have two good years in a row, and so on. One in 32 will do well five years running. Of course, it never occurs to them that their success is random: they attribute it to their superior strategy, and imagine they are in the top 3% of traders. The rest of us see an advertisement for an investment fund showing a consistent good performance over five years. "They must be good", we think, not stopping to think that there are many, many competing funds and it is ones who are doing well whose advertisements we will see, even if their success is entirely due to chance.
Taleb's examples are by no means restricted to markets. Random fluctuations and the survivorship bias exist in all fields. And by another effect he notes, they can be magnified by a positive feedback loop: he calls the effect "bipolarity". An actor who flukes an audition becomes known to more people (and directors), and as a result gets more parts and becomes even more well-known. A disastrous piece of software makes a fluke distribution deal, and then suddenly everyone wants it so they are compatible with everyone else.
We are built to see patterns, to find causes for things, and to believe in our own rationality. We cannot help doing it. The attraction of Taleb's book is that he is very well aware of this. He knows nothing he says can dispel the illusions created by randomness, and that he is as susceptible to them as anyone. His only advantage is that he is aware of the failing, and can try to play tricks on himself to circumvent it - by denying himself access to junk information, for example. The book's short but excellent final section deals with this Zen-like problem of trying to break oneself out of a mould of thinking that cannot be broken, even though one recognises its shortcomings.
Taleb's prose is racy and readable, even if it occasionally betrays a charmingly non-native command of English; his publisher, one feels, could at least have provided a copy-editor, if only to remove almost all occurrences of the word "such", on the uses of which the author's views are eccentric. But it seems quite possible that his headstrong personality led him to refuse any interference. His style is idiosyncratic and vigorous, but none the worse for that.
Taleb himself, incidentally, whose family were ruined in the Lebanese civil war, is the founder of a firm which thrives on unexpected events. He reckons that whereas other traders, by forgetting the rare, unexpected events, notch up steady profits which are wiped out by occasional catastrophic losses, he can take an opposite strategy, which he calls "crisis hunting". He did very well out of the market crash in 1998. He seems to be at home in several languages, and to have a fine appreciation of high culture. Yet strangely, the one question he does not ask is that of the value of what he is doing. Does anyone, apart from himself (or whoever's money he is investing), gain by the work he does? Does it contribute in any way to the wellbeing of mankind? It is not, of course, a question that one expects a book by a market investor to address, but there is nothing typical about this book. With his sensitivity to questions of what is valuable and important, it would be surprising if he has not considered this question, but he is silent about it in the book.
On the other hand, whatever the worth of his trading work, he has written this book, and that itself is a contribution of enormous value. The book is classified as "General Business/Finance/Investment", but it is nothing so specialised: many of his anecdotes are drawn from finance, but what Taleb has written is a manual of how to think. I recommend it to all Plus readers.
Book details:
Fooled by randomness
Nassim Nicholas Taleb
hardback - 223 pages (2001)
Texere Publishing
ISBN: 1587990717
http://plus.maths.org/issue20/reviews/book1/index.html
Also read:
frankly speaking
http://www.frankvoisin.com/?p=52
reviewed by Mark Wainwright
Fooled by randomness - The hidden role of chance in the markets and in life
If you watch a steam engine, you may not know how it works but you can soon get a fairly good idea of its behaviour, and you can predict its future behaviour accurately. Even though you don't understand its workings, you can see it's a pretty simple machine, so you can trust it to behave in a simple way: you have confidence in your predictions based on a short sample of its behaviour.
Most things in life are not like steam engines, but people treat them as if they were. Life in general, and markets in particular, involve large random factors, have complicated stochastic structures, and regularly spring nasty surprises. Their behaviour over short timespans may have so little significance as to be nothing but noise. Extrapolation is impossible or meaningless. Yet try as we might, we continue to see patterns where none exist, misunderstand the role of randomness, seek explanations for chance phenomena, and believe that we know more about the future than we do. And that is the point of this book.
Nassim Nicholas Taleb is a market trader and a professional skeptic. He claims mathematical naivety, but he is clear on one thing: the importance of understanding the structure of random events, their significance and, especially, insignificance. He clearly sees that this understanding is more important than actual calculations: "Mathematics is principally a tool to meditate, rather than to compute". He has seen innumerable traders go to the wall - "blow up", in the picturesque jargon of the trade - when a seemingly successful career is brought to a spectacular end by some "unexpected" market collapse. "No-one could have predicted that", they say, sadly shaking their heads as they leave the trading floor. They have been fooled by randomness.
There are many ways of being the fool of randomness. One, as here, is to fail to predict the rare event. Nothing can be more certain than that the unexpected will happen sooner or later, but lulled into a sense of security by the periods of relative calm between, people forget to allow for it. Another is to see significance in some random pattern. Taleb explains with crystal clarity why the more often you look at some fluctuating quantity (the value of your share portfolio, for example), the less meaning your observations have. Yet he sees traders who watch prices move up and down in real time on screen - the changes are so small as to be completely random - and think they are learning something.
Another, more insidious, is the "survivorship bias": in a random population, some items will be more visible than others. Say we have a collection of traders whose strategies do no better than random: they will have a good year half the time, a bad year the other half. Half of them will have a good year. A quarter will have two good years in a row, and so on. One in 32 will do well five years running. Of course, it never occurs to them that their success is random: they attribute it to their superior strategy, and imagine they are in the top 3% of traders. The rest of us see an advertisement for an investment fund showing a consistent good performance over five years. "They must be good", we think, not stopping to think that there are many, many competing funds and it is ones who are doing well whose advertisements we will see, even if their success is entirely due to chance.
Taleb's examples are by no means restricted to markets. Random fluctuations and the survivorship bias exist in all fields. And by another effect he notes, they can be magnified by a positive feedback loop: he calls the effect "bipolarity". An actor who flukes an audition becomes known to more people (and directors), and as a result gets more parts and becomes even more well-known. A disastrous piece of software makes a fluke distribution deal, and then suddenly everyone wants it so they are compatible with everyone else.
We are built to see patterns, to find causes for things, and to believe in our own rationality. We cannot help doing it. The attraction of Taleb's book is that he is very well aware of this. He knows nothing he says can dispel the illusions created by randomness, and that he is as susceptible to them as anyone. His only advantage is that he is aware of the failing, and can try to play tricks on himself to circumvent it - by denying himself access to junk information, for example. The book's short but excellent final section deals with this Zen-like problem of trying to break oneself out of a mould of thinking that cannot be broken, even though one recognises its shortcomings.
Taleb's prose is racy and readable, even if it occasionally betrays a charmingly non-native command of English; his publisher, one feels, could at least have provided a copy-editor, if only to remove almost all occurrences of the word "such", on the uses of which the author's views are eccentric. But it seems quite possible that his headstrong personality led him to refuse any interference. His style is idiosyncratic and vigorous, but none the worse for that.
Taleb himself, incidentally, whose family were ruined in the Lebanese civil war, is the founder of a firm which thrives on unexpected events. He reckons that whereas other traders, by forgetting the rare, unexpected events, notch up steady profits which are wiped out by occasional catastrophic losses, he can take an opposite strategy, which he calls "crisis hunting". He did very well out of the market crash in 1998. He seems to be at home in several languages, and to have a fine appreciation of high culture. Yet strangely, the one question he does not ask is that of the value of what he is doing. Does anyone, apart from himself (or whoever's money he is investing), gain by the work he does? Does it contribute in any way to the wellbeing of mankind? It is not, of course, a question that one expects a book by a market investor to address, but there is nothing typical about this book. With his sensitivity to questions of what is valuable and important, it would be surprising if he has not considered this question, but he is silent about it in the book.
On the other hand, whatever the worth of his trading work, he has written this book, and that itself is a contribution of enormous value. The book is classified as "General Business/Finance/Investment", but it is nothing so specialised: many of his anecdotes are drawn from finance, but what Taleb has written is a manual of how to think. I recommend it to all Plus readers.
Book details:
Fooled by randomness
Nassim Nicholas Taleb
hardback - 223 pages (2001)
Texere Publishing
ISBN: 1587990717
http://plus.maths.org/issue20/reviews/book1/index.html
Also read:
frankly speaking
http://www.frankvoisin.com/?p=52
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