I Have Been a Busy Bee

Sorry for not blogging much lately, I’ve been busy with two things:

  • Completing and filing my paperwork for registering my investment advisory in the State of Maryland.? My electronic and paper filings are in the hands of the good people at the Maryland Division of Securities, who have been prompt and unfailingly polite?
  • Preparing for my talk to the Society of Actuaries on 10-20-2010. The date is a palindrome if taken two digits at a time.? If you want to read my slides in PDF, they are here.? Powerpoint: they are here.? I give the talk somewhere around 11:15.? Gate crashers can look here. And here.

Just a few notes before I go to sleep:

1) When problems are systemic and large, as they are with foreclosure fraud, and securitization fraud, solutions tend to appear in order to avoid chaos.? This is an awkward time, being before an election, so solutions are hard to arrive at.? But my belief is that given a little time, Congress and the courts will come to a solution that forces the banks to come up with the note, or a close substitute.? The same will happen for securitization certificateholders: since their economic losses on a held to maturity basis are not that great, they will get some small settlement to go away.

2) Insider Monkey’s post on Buffett drew a lot of attention, but there needs to be more critical thinking here.? IM is using Carhart’s four-factor model, and says the recent decade’s alpha is near zero.? Well, Buffett beat the S&P 500 by 6.7%/year over that stretch, which is a hefty margin, beaten by few.? And more remarkable, because he is managing so much money, the dollar amount of true alpha is huge.

But the hidden assumption in the use of the Carhart factors is the idea that no one can use them to make money over time on average.? As a value investor who does try to adjust to when those factors are cheap or dear, I find that assumption ridiculous.? Buffett is always looking for companies that are relatively out-of-favor relative to their prospects.? Even if it is not showing up in the alpha, he still prospers by buying the out-of-favor betas/factors.

3) The US is leading the “race to the bottom” on currencies. Emerging markets are generally holding to tight monetary policy, and their currencies are appreciating versus the lax developed countries who don’t have much mineral wealth.

All for now.? Have to get some sleep, or I will be no good in NYC tomorrow (today).

2 thoughts on “I Have Been a Busy Bee

  1. Thanks for your comment David.

    I explained in a separate article how we calculate alpha and beta with Carhart?s model and what it means. It?s basically a style adjustment. Warren Buffett had been a consistent value investor (the regression results for previous periods also show this); that?s why Carhart?s model adjusts for this. The reason is you can replicate the same return as Buffett’s by tilting your portfolio towards value stocks. If Buffett had been changing his investment style, you would have been right. But he is pretty consistent in terms of value investing and his factor loading has been around 0.4 for each of the past two decades.

    It is also possible to have alpha with Carhart?s model. Buffett had 10%+ alpha between 1977 and 2003 when we use Carhart?s model to calculate alpha. He used to be great stock picker when his portfolio was much smaller and he was nimbler. There are not enough opportunities when you are a $200 billion company with pretty illiquid investments.

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