World Beta Blog

I like Whitney Tilson and the research he puts out.  His housing work is some of the best and thorough research I have seen on the subject.  Whitney and I also agree on another topic (along with others such as Berkowitz and Pabrai) – that following the best minds in investing is a great way to increase your “idea farm”, or where you get stock ideas.  Obviously we take it a bit further with AlphaClone and basically outsource entire portfolios to managers like Tepper and Klarman.  A few quotes from this recent Kiplinger’s article:

“Successful investors prospect for new ideas in a wide variety of ways. They scour databases for undervalued companies. They tap industry contacts for early signs that things are getting better for a company or a sector. They read voraciously and draw from deep experience to see patterns and opportunities that others are missing. For some savvy practitioners, a fertile source of investing ideas is to look at what other smart investors are doing….But a review of the data can provide insights into where opportunities may reside. As Bruce Berkowitz, manager of Fairholme Fund, a member of the Kiplinger 25, says, “Why wouldn’t you look at what other great investors have found?”…We’d never suggest blindly following what any one person does. But it’s certainly worth exploring…”

What sparked my interest is this post over on Barbarian Capital.  He examines Tilson’s portfolio by holding and makes a good case for Tilson running somewhat of a “clone portfolio” himself with a few exceptions sprinkled in.   Why pay 2% and 20% for a best ideas FOF when you can just clone the managers themselves?

If you’re headed to LA for Tilson’s upcoming Value Investing Congress drop me a line I’m in the neighborhood!

Great Great Interview

http://2010.therussiaforum.com/news/session-video3/

Most of the way through The Quants and it is delicious reading.  While a lot is review for someone who is well versed in quant history, there are some interesting tidbits.  Like how the quant grandfather Thorp (also known as probably #2 top performing HF of all time next to Rentec’s Simons) reviewed Madoff’s performance and trades way back in 1991 and decided they were impossible.

I got a few books ordered before my self imposed book buying ban, and two landed today.

How Markets Fail: The Logic of Economic Calamities – by Cassidy

Financial Market Bubbles and Crashes – Vogel

Should be good reading for this looong plane ride to Munchen.  Also printed and taking with my new picture taker the paper Economists, Crises, and Cartoons – Levy and Peart

Lots of buzz about a new study involving the brain and losing $.  We have been chatting about that on WB for a long time, and it is one of the reasons vol explodes when markets are declining.  Stats from my paper:

Volatility explodes when markets are declining, and vol explodes because people get fearful and they are uncertain what to do.  Happens over and over again (the one exception is commodities which tend to be supply/demand driven based on shocks that often result in price spikes).

Some more old posts below:

Here is some other interesting research on neruroeconomics:

One of his findings was that brain images of drug addicts who are about to take another hit are indistinguishable from those of traders who are making money and about to place another trade. “That tells us pretty confidently that if you make money and make money again,” Mr. Zweig said, “it is very similar to a chemical addiction and it becomes very hard to let go.

A nice paper, “Neuroeconomics” by Cramerer and Lowenstein.  Also “Neuroscience and Economic Behavior” by Glimcher

A couple great quotes from Zweig’s excellent book “Your Money and Your Brain“:

“The neural activity of someone whose investments are making money is indistinguishable from that of someone who is high on cocaine or morphine.”

“Financial losses are processed in the same areas of the brain that respond to mortal danger.”

Jason Zweig, author of Your Money and Your Brain , has a good interview in Research magazine here.

Zweig article

Kahneman article

Yield Curve Predictors of Foreign Exchange Returns

I can’t figure out why DB doesn’t launch ETFs/ETNs on the other currency strategies they have (they did in Europe) other than just the carry trade.  Another PDF here.

Abstract:
In a no-arbitrage framework, any variable that affects the pricing of the domestic yield curve has the potential to predict foreign exchange risk premiums. The most widely used interest rate predictor is the difference in short rates across countries, known as carry, but the short rate is only one of many factors affecting domestic yield curves. We find that in addition to interest rate levels other yield curve predictors have significant ability to forecast the cross section of currency returns. In particular, changes of interest rates and term spreads significantly predict excess foreign exchange returns, exhibit low skewness risk, and are lowly correlated with carry returns. Predictability from these yield curve variables persists up to 12 months and is robust to controlling for other predictors of currency returns.

Check out this really cool project my buddies company TShirtAds (I’m an investor) did for the One5 Foundation this weekend to support their efforts in Haiti. They had 50 models across the country wear the shirts for the day to get the word out.  Check out the Facebook page here and the pics of all the models here on the TShirtAds site.

As you eat your nachos today, consider texting “one5″ to 85944 to make a $10 donation…

Update: If you like World Beta, please consider nominating us for the Loeb Awards in blogging and book categories!

I few years ago I wrote and published a paper to avoid taking the CMT Level III Exam.  The timing was fortuitous as it preceded the global meltdown by a few years and illustrated the benefit of diversification as well as using some simple risk management to sit out the simultaneous bear markets.   The real time performance has been far better than the historical numbers, and the system hit new highs at the end of 2009 while the benchmark buy and hold and the S&P500 are still down 30% or so. This is one of the reasons the paper is now in the top 5 in all time downloads on the SSRN. (Had you told me 10 years ago that I would write a popular academic paper, after bursting out laughing, I would have assumed it was in gene therapy…funny where life takes you!)

We tried to expand on the paper a bit in the book, but there are still a lot of common misconceptions about the timing model (it works all the time, it is fail-safe, etc neither of which are true.  Look at January a crappy month for timing model as an example.), but we think it was a simple example of proactive risk management.  We don’t run it remotely like this in-house, but it is a useful description of “how to fish” rather than “where the fish are”.

Below is an updated equity curve and chart of the timing model since 1973.  We are considering writing an update to the model with new additions including a section on global rotation strategies, as well as adding more asset classes (small caps, gold, etc).

The problem is I literally have 7 more papers to write on some really, really cool topics.  So, I’m not sure exactly what will come first.  I thought about posting the 7 topics and letting people vote, but I’m not so sure I want to disclose all of them yet….

Cambria is considering starting a newsletter or perhaps charging for some of the research to:

1.  Give investors an early look at our research, with maybe a 3, 6, or 12 month time lag before we publish the paper publicly for free (it at all).

2.  Update a number of our strategies in depth.  I get dozens of emails every day about people wanting to know specifics, how we manage money (proprietary), and how to update the portfolios.  I had hoped that providing links on the website and publishing a free monthly update would have accomplished this, but it only generates more emails.  Not sure what the solution is here.

3.  Circulate our investment research.

So, if you have any thoughts or suggestions on paper topics, publication methods, etc let me know in the comments.

1973-2009

And the real time results.

2006-2009

I’m creating some more fund groups over on AlphaClone.    Below are some old lists I had of activist and merger funds.  Leave comments with additions and subtractions.

ACTIVIST

Bulldog

Barrington

Cannell

Chapman

Crescendo

Elliott

Fine

Ichan

JANA

Liberation

Karpus

Newcastle

Pershing Square

Polygon

Relational

Sardus

Steel

TCI

Third Point

Tracinda

Shamrock

Watershed

MERGER ARB FUNDS

Eton Park

Farallon

Paulson

I am a big fan of Richard Ferri.  If you are going to pay someone to buy and hold, he makes 99% of my industry IRRELEVENT with his basement maximum fee of 0.25%.  Nice article by Richard on microcaps.

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Lots of chatter about a Tesla IPO.  I think this Wired story on Local Motors is much more interesting.

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Fido offering commission free trading for some ETFs.

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An ETF provider is trying to get around the concerns of issuer risk for ETNs by spreading it around.  Wish they were around when we were going to launch our ETN on the foreign listed hedge funds.

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Well this is certainly a surprise.

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You know I think most aggregators do a HORRENDOUS job.  Steve Rosenbaum agrees.  The whole point of of an aggregator (to me) is less, but more useful info rather than more of less useful info.

Interesting to see Abnormal Returns new take on this.  AR is my favorite aggregator, but I am not sold on the new layout.  It seems like you want to do one or the other – ie a daily email, or a continuous one like Kottke and Instapundit (two I consider best in class at aggregation).

More to come, stay tuned.

McKinsey report here.

Summary here.