Portfolio Management is a Tough Business

I know we all make fun of hedge fund managers, most of whom are overpaid, but running a portfolio is not easy. If investing was considered as a business--Benjamin Graham said it should be considered a business--then it is one of the toughest businesses out there. Andrew Ross Sorkin of The New York Times profiles Ronald Insana, a CNBC personality who left to run a hedge fun a couple of years ago.

As an investor, Mr. Insana didn’t exactly have the wind at his back. During the 14 months his fund of funds was up and running, the Standard & Poor’s 500-stock index fell more than 15 percent. While some hedge funds managed to eke out gains, many did not. Ultimately, Mr. Insana’s fund lost 5 percent.

In the mutual fund business, beating the S.& P. would be more than enough to survive, and even prosper. Mr. Insana would have been a hero. But the hedge fund business is far more cut-throat. For a small fund like Mr. Insana’s, it is imperative to make money regardless of whether the S.& P. is up or down — and because he didn’t, the 20 percent portion of his fee structure was worth nothing.


I think if someone wanted to run a "business," they are probably better off trying their hand at inventing a new device, developing some service, running a retail operation, or some such thing. Investing is far tougher (just look at my record *bangs head against wall*) and possibly less productive to society. It is perhaps better to attempt investing 'on the side' while having a full time job, or studying in school, or whatever. Although it would limit your ability (won't have all day to read the paper, analyze companies, etc,) it may be easier to handle and will afford you the opportunity to recover from mistakes.

Comments

  1. A good-old-fashioned deflationary depression should cure lots of ills in our unbalanced world. Chief among them the ridiculous compensation that people in financial services industry get.

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  2. I am sure we will find that a very comforting thought while in our trenches...

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  3. Methinks Synchro is well set in his preparation for trench warfare ;) ... already 100% in cash I believe... next step is to liquidate his cash (US$ going to zero, no?) and buy some guns, gold and a nuclear bomb shelter...

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  4. Why do you think I HAVE HAD SO MUCH FUN during the last 2 years?

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  5. Synchro's portfolio is as bad (or good) as mine in a true deflationary collapse. All "paper" assets (shares, bonds, cash, certificates of watever sort) will be equally worthless.

    The only things that will be worth having in a true deflationary collapse are:

    1. Guns (and associated ammo) preferably simple easy to maintain and repair designs.

    2. Good farmland in a remote easily defended location (better brush up on your subsistence farming skills too!)

    Oh, and make sure you have your most trusted friends and family livng nearby.

    Synchro,

    You were shorting through 2007 right? I'm sure you had great fun! You see, contrarian investing is fun and easy...

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  6. A deflationary depression doesn't mean the End of the Civilization. Yes, debt will be repudiated and jobs will be lost, but people will continue to live.

    Once you realize debt is just a state of mind and repudiate it, you realize the excessive materialism of the last 3 decades is just a bad fever. Once the fever breaks, people will go back to living _sane_, reasonable lives. One way or another, people will have to let go a standard of living that is not affordable or sustainable.

    That's one thing I agree with CD: in the end only family and friends matter.

    But owning a revolver or shotgun may not be a bad idea since some people will turn desperate.

    We are getting WAY AHEAD of ourselves though. There are still monolines to be bankrupted, banks to be suffer massive runs (despite FDIC assurance), retailers to be busted, faux-value managers to be utterly humiliated and the fired in a very public manner, and aspiring amateur investors to learn their limitations.

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  7. Synchro,

    You assume, mistakenly and in complete ignorance of history, that a massive delevering can take place without affecting the functioning soceity. "Just repudiate the debts and we will all live happily ever after".

    Go read about the Great Depression and it's aftermath, consider that our society is far more levered than the 1920's ever were and then think about the likely consequences now (and do take into consideration that the great conurbations of this world have no hope of getting fed after trade has fallen apart).

    What's with the quasi-religious stuff about "punishing sinners" and "cleansing the Earth" anyway?

    You are correct on two points though.
    1. It will not be the end of civilization, rebuilding will take a couple of generations but will happen.

    2. the really important one: friends and family are the most important element in a happy live.

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  8. Funny, but I got to hand it to you: you turned _my_ macroeconomic thesis against me and accused _me_ for ignorant of history and _not being pessimistic enough_. I do take a bit of issue with you accusing me being ignorant about history though.

    [To temporarily turn off my part of the mutual retort and contempt for each other, here is an advertisement for a good Great Depression book: The Forgotten Man, by Bloomberg's Amity Shlaes]. It helped reduced a bit of my ignorance about history, will it help you? I don't know.

    But...nevertheless...

    Where did I say people will live happily ever after after repudiating their debt? All i am saying is that since debt will be have to be repudiated anyway, people should make the best of it and not deny reality.

    I guess I used the single world "materialism", and in comes the "quasi-religious" comment. LOL. All I am commenting is about the consumption-oriented society and mindset that will be tough sustain in a downturn.


    PS: I realized you have some hurt feelings from being mocked about your investment approach, so I understand the kneejerk abrasiveness (I practice that myself as well, so I don't fault you for straining to do that, as opposed to what comes so naturally to me)

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