Past performance and Shakespeare

Macbeth came to mind when reading the posts from a couple of regular spraying spots in Guambat's rounds.

First, Felix Salmon had a couple of posts, reiterating what Guambat has felt, thus finding those particular posts insightful and brilliant.

Mutual fund charts of the day

For the vast majority of actively managed funds, true alpha is probably negative; that is, the fund managers do not have enough skill to produce risk adjusted expected returns that cover their costs.

Which comes as no surprise, but it’s still good to see some relatively solid empirics here. Anybody wanting to make an intellectually-credible case in favor of investing in actively-managed mutual funds is going to have to attack this paper head-on.

Why bonds aren’t good investments

If you think it is reasonable to get a 5% return on top of inflation without taking risk, I have some oceanfront property in Nevada to sell you.

Investing is not about loaning your funds out to a government, completely abdicating responsibility for finding meaningful uses for the capital and then expecting a substantial return above inflation. Our governments are nearly bankrupt.

If you lend to a nearly bankrupt and profligate entity, you deserve to lose a lot of money. You are like a bartender serving a drunk who is drinking himself to death. You are not innocent. You are part of the problem, and your investments are making the world worse. You don’t deserve a good return for that

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The points here, Guambat mulls, are not that neither stocks nor bonds are good investments, it's just that expectations of above average returns from either is too speculative to pay off for most of us. Therefor, rein in those horns or expectation and protect capital.

Which is the general line that John Hussman espouses. As he put it a couple of weeks ago, "we're doing our best to maintain equanimity about market direction, while keeping defense as our primary concern."

He's back this week trying not to get too disturbed by ("maintain equanitmity about") the consequences of not being in the chase in the stock markets that started last March and has not really let up since:

our year-to-date returns might now be into a second digit had I recognized that investors have learned utterly nothing from the bubbles and collapses of the past decade. That recognition might have encouraged a greater weight on trend-following measures versus fundamentals, valuations, price-volume sponsorship, and other factors.

Whether or not I have focused too much on probable “second-wave” credit risks is something we will find out in the quarters ahead – my record of economic analysis is strong enough that a “miss” on that front would be an outlier. What I do think is that over the past decade, investors (including people who hold themselves out as investment professionals) have become far more susceptible to reckless myopia than I would have liked to believe. They have become speculators up to the point of disaster.

Frankly, I've come to believe that the markets are no longer reliable or sound discounting mechanisms. The repeated cycle of bubbles and predictable crashes over the recent decade makes that clear.

But what's the Macbeth link?

Obviously, that past performance or stocks and bonds is no guaranty of future performance, nor is the pursuit of today's alpha a promise of tomorrow's returns. Shakespeare of course put it this way:

"Tomorrow and tomorrow and tomorrow,
Creeps in this petty pace from day to day
To the last syllable of recorded time,
And all our yesterdays have lighted fools
The way to dusty death. Out, out, brief candle!
Life's but a walking shadow, a poor player
That struts and frets his hour upon the stage
And then is heard no more: it is a tale
Told by an idiot, full of sound and fury,
Signifying nothing."

But, back to Hussman:

One of the fascinating aspects of the past few months is the lack of equilibrium thinking with respect to what happened to the trillions of dollars in government money that has been spent to defend the bondholders of mismanaged financial companies.

Almost by definition, money given to corporations will show up most quickly as improvements in corporate earnings, and then slightly later, as executive compensation.

A few pieces came across my desk last week, hailing the ability of the corporate sector to bounce back from the recent economic downturn even though revenues have continued to suffer and employment has been steeply cut.

Why is this a surprise? Where else could the money have gone?

Labor compensation?

It is truly mind-numbing that a moment after a temporary surge of trillions of dollars, borrowed and tossed out of a helicopter (though to specific corporations and private beneficiaries), analysts would hail a subsequent improvement in corporate results as evidence of “resilience.”

What matters is sustainability, and unfortunately, it is clear that credit continues to collapse.