Recent quotes:
John Maynard Keynes’s Own Portfolio Not Too Dismal - The New York Times
Although he was building wealth for his own account and the institutional funds throughout the 1920s, he did not see the 1929 debacle coming and was almost cleaned out again. The 1929 crash and resulting Great Depression left Keynes intellectually shellshocked, so he changed his strategy. Professor Chambers and Professor Dimson discovered that sometime in the early 1930s he backed away from short-term trades and commodities and focused on stocks. No longer would he pay attention to overarching economic theories or short-term sentiment: The “animal spirits” of the market’s unpredictable pixies could not be trusted. He sensed that security prices were not true indicators of company values.Investors Are Losing a Recession Shootout Against the Fed - Bloomberg
Now, is there anything we can learn from the shootout? As it turns out, there is. It concerns what experts in behavioral finance call “activity bias” and I wrote about it many years ago here. The notion is that in sports, but also in investing, there is an ingrained human sense that we ought to be seen to be doing something. Thus, fund managers buy and sell and churn their portfolio, rather than buying and holding and minimizing trading costs. In sports, baseball players find it far less embarrassing to strike out having taken a swing at the ball than to strike out with the bat still on their shoulder. And in the drama of the penalty shootout, goalies feel obliged to do something — take a guess and dive one way or the other. So likely are goalies to dive that strikers can generally assume they won’t stay in place, and therefore they can occasionally try hitting the ball straight in front of them. By doing so, they're taking advantage of the goalkeeper’s activity bias. Goalies should consider just standing there.The Paranoid Style in American Investing in 2021 - Bloomberg
An emerging theory, the Inelastic Markets Hypothesis, postulates that retail buying is able to warp prices for prolonged periods because so much of the market is now passive, not actively managed, and is therefore insensitive to changes in prices. “Demand shocks and inelastic markets are the tissue that connects the meme stocks, Tesla and even crypto” says Philippe van der Beck, a researcher at the Swiss Finance Institute. 2 “Bitcoin can be seen as an extreme version of today’s stock market: it’s almost entirely detached from fundamental value as there are no cash flows for investors to discount. People are just betting on how they think demand for the asset will change in the future”When to break from the herd to make a better decision -- ScienceDaily
Researchers found that when people saw others in their group hesitating before making a choice, they were about twice as likely to break from the group and make a different choice. "When we see other people hesitate before making a choice, that tells us they were conflicted, that they weren't entirely sure they were making the right decision," said Ian Krajbich, co-author of the study and professor of psychology and economics at The Ohio State University. "That makes people less confident in the group consensus and frees them to make decisions based on their own information. That can help groups to escape bad outcomes."Bitcoin Climbs as Analysts Say Getting Back to $40,000 Is Key - Bloomberg
“I dread to think what most risk officers would think about that being in a core investment portfolio,” the chief investment officer of core investments at Axa Investment Managers wrote in a note. “For assets to be considered in a long-term investment portfolio one should be able to attach some fundamental intrinsic value to them.”Why Angel Investors Don’t Make Money … And Advice For People Who Are Going To Become Angels Anyway | TechCrunch
If the average VC fund barely makes money, and seed investments represent even less compelling opportunities than the ones pursued by venture capital firms, then the typical return for angels must be atrocious. Even Ron Conway’s second angel fund, which had the good fortune to invest in Google (a 400x cost winner), only broke even (that means close to a 0 percent IRR)!Animals, like humans, place a higher value on what requires more effort.
We have examined the justification of effort effect in animals and found a pattern similar to the one in humans but we propose a simpler underlying mechanism: contrast between the greater effort and the resulting reward that follows. The contrast model predicts that any relatively aversive event will result in a preference for a reward (or for the signal of a reward) that follows. Much evidence supports this model: Signals for reward are preferred if they are preceded by having to make a greater number of responses, encountering a longer delay, or experiencing the absence of food (when food is presented on other trials). Contrast has also been found when the signals are associated with greater rather than less food restriction. We have also found a shift toward the preference of a food location that requires greater effort to obtain. Analogous effects have been found in humans (both children and adults) using similar procedures.Munger: pick your fights pt 2
f you look at Berkshire Hathaway and all of its accumulated billions, the top ten insights account for most of it. And that's with a very brilliant man—Warren's a lot more able than I am and very disciplined—devoting his lifetime to it. I don't mean to say that he's only had ten insights. I'm just saying, that most of the money came from ten insights.Gentry investing
Investing has become the genteel occupation of our gentry, like having a country estate used to be in England. It's a class marker and a socially acceptable way for rich techies to pass their time. Gentlemen investors decide what ideas are worth pursuing, and the people pitching to them tailor their proposals accordingly. The companies that come out of this are no longer pursuing profit, or even revenue. Instead, the measure of their success is valuation—how much money they've convinced people to tell them they're worth.Hedge funds are clunkers
Specifically, only one-fifth of more than 5,500 hedge funds from 1994 to 2010 had nonlinear exposures to risk factors that drive hedge funds returns, the study found. An overwhelming two-thirds of the funds exhibited only linear risk exposures—or were passive. “These results mean that while in the short term hedge funds may engage in dynamic trading strategies involving complex securities, over the long run many of them behave like alternative beta portfolios,” the authors wrote.7 Rejections for AirBnB
We were attempting to raise $150,000 at a $1.5M valuation. That means for $150,000 you could have bought 10% of Airbnb. Below you will see 5 rejections. The other 2 did not reply.VCs betting on lawsuits
For better or worse, the lawsuit-finance market continues to grow. Hedge funds and others speculating on litigation are making more and larger bets. Some corporate lobbyists warn that the new financial engineering encourages wasteful courtroom warfare, but investor demand for fat returns—and big law firms' appetite for business—guarantee the spread of litigation finance.
The hard part is getting the first offer. Once you have this, you have the leverage -- if other investors don’t act fast, you have an offer you can take, and they risk missing a potentially great opportunity (and maybe looking stupid to their partners, etc etc.) Until then, they can procrastinate and wait as long as they want. It’s remarkable how long it can take the first offer to come in, and how quickly the next ten can materialize.
Because hedge funds are often flexible in their mandates, they have the capacity and permission from their LPs to fund private deals. Also, hedge funds aren’t beholden to returning money in the same way VCs are. They can be flexible on pricing and valuations, because a 10 or 20 percent return is stellar. Last year, hedge funds returned an average of 7.4 percent. VCs aim toward a much higher percent return — and need to price and value startups to optimize for that. And because of this flexible structure, hedge funds can give founders cash more quickly than a VC. Hedge funds have their cash on hand and can liquidate faster. VCs operate on a commitment basis and don’t collect their entire funds at once. One investor referred to hedge funds as ideal for “easy, quick cash.”
the most significant excess returns earned from venture capital occurred in funds raised prior to 1996, and those funds averaged $96 million in committed capital. Many of those successful funds led managers to raise successively larger funds; which significantly eroded returns and maximized general partner profits through fee-based income at the expense of limited partner success.
"The result is that institutional investors end up paying general partners – who typically commit only 1 percent of partner dollars to a new fund while LPs commit the remaining 99 percent – quite handsomely to build funds, not build companies," said Mulcahy.
Let's say you make a $100 investment in each of three funds. One is a simple investment in an index. Then you have two leveraged funds that compound daily; one is double-long and the other is double-short (returning twice the inverse of the index). After one day, the index returns 10%. The index value would then be $110. The double-long would add 20% and end at $120, and the double-inverse would lose 20% and end at $80.
On day two, let's say the index loses 10%. That means that the average return [(10% -10%)/2] would be zero. However, the index itself would end at $99 because 10% of $110 is $11, and $110 minus $11 is $99. The fund that promises double the return of the index but compounds daily would end at $96. Remember, this fund started the day at $120. Its return for day two is -20% (double the index's loss), and leaves it with a $24 loss for the day. So, $120 minus $24 is $96. The double-short fund would also end at $96 because 20% of $80 is $16, and $80 plus $16 is $96.
If you were to repeat 10 consecutive days of up 10% days followed by down 10% days, both of the leveraged funds would end up at $81.54, which is a sizable difference from the $95.10 the index would end at. Repeat this process for only six months, and your 'investment' in either of these leveraged funds would stand at only $2.54. Yes, that's a 97.46% loss. Talk about tracking error.
That's why compounding of daily returns is the dead horse that apparently needs a little more beating. Leveraged and inverse ETFs are NOT meant to be held as long-term investments. Let me repeat myself: Very bad things not only can happen whenever you hold these ETFs longer than their indicated compounding period (typically one day for stock-based ETFs, sometimes monthly for commodities), you are almost mathematically guaranteed to get a return that is not double that of the index. In fact, the longer you hold one of these funds, the probability that you will get nothing close to double the returns increases.