Posts tagged with market beta

Random portfolios have the power to revolutionize fund management.

There is no convincing evidence that more than a handful of funds have consistently outperformed. This should tell every active fund manager on the planet that the present form of performance measurement is inadequate.

Performance measurement via a benchmark is hopelessly noisy — it takes decades to get a real answer.

A fund manager that can outperform should do better when the tracking error constraint is removed. Much better to use random portfolios to measure the performance of active funds to see if they are adding value. Funds should be judged with minimum tracking error constraints. It is in the investor’s best interest for the active funds they invest in to be as uncorrelated as possible with the indices that they invest in passively. That means a large tracking error.

Patrick Burns

(edited and amalgamated by me, without adding anything substantial)


I’m trying to do retrospectives on financial predictions as I stumble across them on the Web. Here’s one that turned out correct: @EpicureanDeal said not to buy Blackstone Group when it went public.

"A little knowledge is a dangerous thing." Like, say, a little knowledge of cool and funky rich people or private equity deals from the paper. I’d rather be financially illiterate than taken hold of this bag.

From 35, to 25, to 15, to 5. Since the market bottom $BX has quintupled which is basically in line with the S&P.

Correlation since 2008 of the S&P to $BX has been 95%, so you can rule out a “complementary growth” argument for the buy.

Reproducible analysis:

reChart(up.col='yellow', dn.col='light blue', color.vol=FALSE)
chartSeries(BX/SPY)         #quantmod automatically matches subsets for you!
reChart(up.col='yellow', dn.col='light blue', color.vol=FALSE)
bx <- BX['2008:']
sp <- SPY['2008:']

CAPM assumes a positive correlation between risk and reward. The exact opposite is true with value investing. If you buy a dollar bill for 60 cents, it’s riskier than if you buy a dollar bill for 40 cents, but the expectation of reward is greater in the latter case.

One quick example: The Washington Post Company in 1973 was selling for $80 million in the market. At the time, that day, you could have sold the assets to any one of ten buyers for not less than $400 million, probably appreciably more. The company owned the Post, Newsweek, plus several television stations in major markets. Those same properties [were] worth $2 billion [in 1984], so the person who would have paid $400 million would not have been crazy.

What’s the social function of Warren Buffett's style of value investing? It saves worthy, established companies from being unfairly shorted below a base sanity valuation.

Consider that large companies have more employees, more customers, and more suppliers. Saving them is like stopping a large swath of forest from burning.

But for my personality type, I’m not as interested in big, publicly held companies. Maybe it’s unreasonable of me. But I am more for shorting the big dogs (the over-valued ones) and for longing the small guys (the ones that just need to be given a chance).

I think that’s more exciting and more interesting. Maybe it’s also more speculative; maybe you have less control over the risk.