Comments on: Wrap Up Post from Yesterday http://alephblog.com/2007/02/22/wrap-up-post-from-yesterday/ Helping Institutions and Ordinary People Invest Better by Focusing on Risk Control Fri, 25 May 2012 00:25:08 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: David Merkelhttp://alephblog.com/2007/02/22/wrap-up-post-from-yesterday/comment-page-1/#comment-47 David Merkel Tue, 27 Feb 2007 16:59:35 +0000 http://alephblog.com/?p=16#comment-47 Ken Fisher is always a good read, and I owe him a lot for the e-mail conversations we had seven years ago. It prompted me to evaluate what worked best and worst in my methods, leading to my current approach which is still adapting. Next month in RealMoney I will have an article on my new eighth rule, which is on portfolio reshaping. <P/> You did well not to "trash talk" a competitor. Winners are comfortable with others doing better than them; winners work to improve their own game. <P/> And yes, personal handling makes a ton of difference; I'm not the best at it, but relational capital can paper over a lot during bad times. <P/> Finally, never overpromise. When I was in the pension division at Provident Mutual, our best representatives sold on the features of the product, which was one of the best in the small case pension market. The worst reps sold rate. "We beat the market by 10% last year in our core fund...." Given that a lot of outperformance is not repeatable, due to factors not controllable by the investor, when performance mean-reversion hit, we would lose clients rapidly that bought on the basis of high return expectations. <P/> Treating your clients fairly is the right thing, and in the long run, builds a stable business. Ken Fisher is always a good read, and I owe him a lot for the e-mail conversations we had seven years ago. It prompted me to evaluate what worked best and worst in my methods, leading to my current approach which is still adapting. Next month in RealMoney I will have an article on my new eighth rule, which is on portfolio reshaping.

You did well not to “trash talk” a competitor. Winners are comfortable with others doing better than them; winners work to improve their own game.

And yes, personal handling makes a ton of difference; I’m not the best at it, but relational capital can paper over a lot during bad times.

Finally, never overpromise. When I was in the pension division at Provident Mutual, our best representatives sold on the features of the product, which was one of the best in the small case pension market. The worst reps sold rate. “We beat the market by 10% last year in our core fund….” Given that a lot of outperformance is not repeatable, due to factors not controllable by the investor, when performance mean-reversion hit, we would lose clients rapidly that bought on the basis of high return expectations.

Treating your clients fairly is the right thing, and in the long run, builds a stable business.

]]> By: Paul in Kansas Cityhttp://alephblog.com/2007/02/22/wrap-up-post-from-yesterday/comment-page-1/#comment-44 Paul in Kansas City Tue, 27 Feb 2007 04:32:14 +0000 http://alephblog.com/?p=16#comment-44 Probably most of the readers have access to RealMoney; your article "Evolution of an investment style" is a good read as it elaborates how you spread your positions out across industries to build your portfolio. Ken Fisher's new book was a good read; it discusses(relating to your comments on risk control) when you deviate from your chosen index that you are taking benchmark risk. This is a good read for all of us and you can see David's work reflects Ken's thoughts on this. As an aside I met several potential clients Summer 2002 that were in Fisher separate accounts; of course they become clients March 2002 and got clobbered; Ken was about 90 days early shifting his portfolio. I had the unenviable position of lobbying for business and being decent enough (and smart enough!!) not to criticize a great thinker. Some I ended up with; some I did not; but for all of these people not having the personal touch/handholding made it extremely difficult for them to stick with ANY strategy. This is obvious, but it can be extremely discouraging when prices collapse and you have to stick with what your doing. Individuals that had a portfolio designed for cash flow (interest and dividends) suffered much less anxiety. That said; i had a client (July25,2001 investment date) that declined "only" 10% to the bottom October 2002; it was only being able to deal with him personally that he stuck with it. I don't look like a doofus now; but I had to defend what i was doing many times. Now I'm waiting for the 10% plus spreads again (if only i can avoid the carnage getting there)!! Past track records are no fun really; you need to use them to demonstrate competence; but true competence is knowing that it is not a sure thing going forward. Now if clients would only cut you slack for that admission. . . Probably most of the readers have access to RealMoney; your article “Evolution of an investment style” is a good read as it elaborates how you spread your positions out across industries to build your portfolio. Ken Fisher’s new book was a good read; it discusses(relating to your comments on risk control) when you deviate from your chosen index that you are taking benchmark risk. This is a good read for all of us and you can see David’s work reflects Ken’s thoughts on this.

As an aside I met several potential clients Summer 2002 that were in Fisher separate accounts; of course they become clients March 2002 and got clobbered; Ken was about 90 days early shifting his portfolio. I had the unenviable position of lobbying for business and being decent enough (and smart enough!!) not to criticize a great thinker. Some I ended up with; some I did not; but for all of these people not having the personal touch/handholding made it extremely difficult for them to stick with ANY strategy. This is obvious, but it can be extremely discouraging when prices collapse and you have to stick with what your doing. Individuals that had a portfolio designed for cash flow (interest and dividends) suffered much less anxiety. That said; i had a client (July25,2001 investment date) that declined “only” 10% to the bottom October 2002; it was only being able to deal with him personally that he stuck with it. I don’t look like a doofus now; but I had to defend what i was doing many times. Now I’m waiting for the 10% plus spreads again (if only i can avoid the carnage getting there)!!

Past track records are no fun really; you need to use them to demonstrate competence; but true competence is knowing that it is not a sure thing going forward. Now if clients would only cut you slack for that admission. . .

]]> By: David Merkelhttp://alephblog.com/2007/02/22/wrap-up-post-from-yesterday/comment-page-1/#comment-43 David Merkel Tue, 27 Feb 2007 04:07:46 +0000 http://alephblog.com/?p=16#comment-43 Paul, alas in my younger days I lost a lot of money on Caldor, imitating Michael Price. Ate up 10% of my net worth. I've had eight bone-crunching losses in my time, and someday I'll write a post about them all. That said, the gains have far outweighed the losses, and I am grateful to God for the success that he has given me. I don't take my past track record for granted; the next seven years could be as bad as the last seven were good. But that's why I focus on risk control. Paul, alas in my younger days I lost a lot of money on Caldor, imitating Michael Price. Ate up 10% of my net worth. I’ve had eight bone-crunching losses in my time, and someday I’ll write a post about them all. That said, the gains have far outweighed the losses, and I am grateful to God for the success that he has given me. I don’t take my past track record for granted; the next seven years could be as bad as the last seven were good. But that’s why I focus on risk control.

]]> By: Paul in Kansas Cityhttp://alephblog.com/2007/02/22/wrap-up-post-from-yesterday/comment-page-1/#comment-41 Paul in Kansas City Tue, 27 Feb 2007 03:49:51 +0000 http://alephblog.com/?p=16#comment-41 The DITM calls strategy is a decision that requires picking a short term direction (usually a few months out). Look at the energy sector after the May top; the rotation out of the sector (it's not as if the fundamentals deteriorated meaningfully in my opinion) made those trades money losers; averaging down is not for the faint of heart. I tried this with Valero calls in April with July expiration; DITM became out of the money pretty quickly; it worked so well back in 2005 sigh!!!!!!!! This is an area where "technical" aptitude is required and I think you have to be willing to pull the trigger to get out of a bad decision relatively quickly. The effort I put into understanding the company was WORTHLESS for this type of strategy! David is a good sanity check! Sadly, sometimes you need to pay market tuition to learn this lesson. The DITM calls strategy is a decision that requires picking a short term direction (usually a few months out). Look at the energy sector after the May top; the rotation out of the sector (it’s not as if the fundamentals deteriorated meaningfully in my opinion) made those trades money losers; averaging down is not for the faint of heart. I tried this with Valero calls in April with July expiration; DITM became out of the money pretty quickly; it worked so well back in 2005 sigh!!!!!!!!
This is an area where “technical” aptitude is required and I think you have to be willing to pull the trigger to get out of a bad decision relatively quickly. The effort I put into understanding the company was WORTHLESS for this type of strategy! David is a good sanity check! Sadly, sometimes you need to pay market tuition to learn this lesson.

]]> By: David Merkelhttp://alephblog.com/2007/02/22/wrap-up-post-from-yesterday/comment-page-1/#comment-36 David Merkel Mon, 26 Feb 2007 16:43:07 +0000 http://alephblog.com/?p=16#comment-36 Richard has cut back on the false precision, from what I have seen; I think he got the hint after a number of columnists took him to task on that. <P/> Regarding Mr. Dykstra, I have tried to engage him in the CC over this, but to no avail. Steve Smith's criticisms are relevant as well; long dated deep in the money options are a financing vehicle for owning stock. Typically, his ideas are geared 4-5x versus owning the common outright. <P/> What seems to allow his strategy to work is that focuses on large cap stocks that have taken a beating. He's getting a little mean-reversion to help him. I can't be totally critical of what he does, but it's not a way that I can play the game, and I don't recommend it to others. Richard has cut back on the false precision, from what I have seen; I think he got the hint after a number of columnists took him to task on that.

Regarding Mr. Dykstra, I have tried to engage him in the CC over this, but to no avail. Steve Smith’s criticisms are relevant as well; long dated deep in the money options are a financing vehicle for owning stock. Typically, his ideas are geared 4-5x versus owning the common outright.

What seems to allow his strategy to work is that focuses on large cap stocks that have taken a beating. He’s getting a little mean-reversion to help him. I can’t be totally critical of what he does, but it’s not a way that I can play the game, and I don’t recommend it to others.

]]> By: aliens8mycowhttp://alephblog.com/2007/02/22/wrap-up-post-from-yesterday/comment-page-1/#comment-33 aliens8mycow Mon, 26 Feb 2007 12:55:18 +0000 http://alephblog.com/?p=16#comment-33 I also wonder about Richard Suttmeier -- he seems way to precise for something that is fuzzy at best...I mean, to me it doesn't make sense to say that stock ABC is 18.618382% undervalued but I did see Richard and Lenny Dykstra on CNBC once (I think that Richard is a mentor of sorts for Lenny)...speaking of Lenny, I question the "low risk" part of his "low risk, high reward deep in the money call buying strategy" I also wonder about Richard Suttmeier — he seems way to precise for something that is fuzzy at best…I mean, to me it doesn’t make sense to say that stock ABC is 18.618382% undervalued

but I did see Richard and Lenny Dykstra on CNBC once (I think that Richard is a mentor of sorts for Lenny)…speaking of Lenny, I question the “low risk” part of his “low risk, high reward deep in the money call buying strategy”

]]> By: David Merkelhttp://alephblog.com/2007/02/22/wrap-up-post-from-yesterday/comment-page-1/#comment-22 David Merkel Sat, 24 Feb 2007 00:38:15 +0000 http://alephblog.com/?p=16#comment-22 I was going to post this around 1 pm, but had technical difficulties: On a day like today, with the long end rallying, it certainly seems like a normal yield curve is far away... given my call on the Fed on hold for 2007, something would have to have to make the bond market sell off on the long end to normalize things. I don't see it in the near term, but who can tell? long TLT and some short stuff... but little in-between I was going to post this around 1 pm, but had technical difficulties:

On a day like today, with the long end rallying, it certainly seems like a normal yield curve is far away… given my call on the Fed on hold for 2007, something would have to have to make the bond market sell off on the long end to normalize things. I don’t see it in the near term, but who can tell?

long TLT and some short stuff… but little in-between

]]> By: Paul from Kansas Cityhttp://alephblog.com/2007/02/22/wrap-up-post-from-yesterday/comment-page-1/#comment-16 Paul from Kansas City Fri, 23 Feb 2007 17:23:21 +0000 http://alephblog.com/?p=16#comment-16 Totally agree buying before the curve normalizes. Easy challenge right? lol. The Bull case for CBH (although you can't make a low price to book argument for it); is the deposit inflows are strong enough that they can survive a low NIM environment; when the curve normalizes earnings really ought to grow. That said JJC has commented that exposure to NJ real estate/bad loan risk etc. can certainly kill the stock. When I see the deposit growth numbers it makes me believe they can abosrb mistakes better than most and continue to grow book value; but I think the stock can sit here for some time if the normalization of the curve is 18 months out; it could happen and David and others on Real Money have put up credible arguements about later rather than sooner on rate cuts. Totally agree buying before the curve normalizes. Easy challenge right? lol. The Bull case for CBH (although you can’t make a low price to book argument for it); is the deposit inflows are strong enough that they can survive a low NIM environment; when the curve normalizes earnings really ought to grow. That said JJC has commented that exposure to NJ real estate/bad loan risk etc. can certainly kill the stock. When I see the deposit growth numbers it makes me believe they can abosrb mistakes better than most and continue to grow book value; but I think the stock can sit here for some time if the normalization of the curve is 18 months out; it could happen and David and others on Real Money have put up credible arguements about later rather than sooner on rate cuts.

]]> By: David Merkelhttp://alephblog.com/2007/02/22/wrap-up-post-from-yesterday/comment-page-1/#comment-13 David Merkel Fri, 23 Feb 2007 05:30:59 +0000 http://alephblog.com/?p=16#comment-13 Jeff, thanks much. That meant a lot to me. Paul, old pal... Richard Suttmeier has been a bit of a conundrum to me. Initially, I did not like him, but I have grown to like him a little. (I have a funny story that I can share at a future time.) His comments on the banks are in aggregate reasonable. The challenge is ferreting through which ones will be badly hurt, which ones won't, and which ones may benefit. The firm I work for is really good at that (but too bearish), but I'm not the one with that skill. <P/> In a true bank meltdown, there aren't any hiding places. The banks I hold at present are all foreign -- ABN, RBSPF, and BCS. They all have significant non-interest margin income. That's a plus in this environment. Slightly before the curve normalizes, it will be time to buy banks with bad, but not terminal, net interest margins. <P/> long ABN, BCS, RBSPF Jeff, thanks much. That meant a lot to me.

Paul, old pal… Richard Suttmeier has been a bit of a conundrum to me. Initially, I did not like him, but I have grown to like him a little. (I have a funny story that I can share at a future time.) His comments on the banks are in aggregate reasonable. The challenge is ferreting through which ones will be badly hurt, which ones won’t, and which ones may benefit. The firm I work for is really good at that (but too bearish), but I’m not the one with that skill.

In a true bank meltdown, there aren’t any hiding places. The banks I hold at present are all foreign — ABN, RBSPF, and BCS. They all have significant non-interest margin income. That’s a plus in this environment. Slightly before the curve normalizes, it will be time to buy banks with bad, but not terminal, net interest margins.

long ABN, BCS, RBSPF

]]> By: Jeff Millerhttp://alephblog.com/2007/02/22/wrap-up-post-from-yesterday/comment-page-1/#comment-11 Jeff Miller Fri, 23 Feb 2007 00:27:11 +0000 http://alephblog.com/?p=16#comment-11 David - This has a very nice look and already some useful ideas and information. Like others who read your work on RealMoney, I'll appreciate the chance for more interaction. You are on my RSS reader :) Best of luck! Jeff David -

This has a very nice look and already some useful ideas and information. Like others who read your work on RealMoney, I’ll appreciate the chance for more interaction. You are on my RSS reader :)

Best of luck!

Jeff

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