Steely Dan Wrote: ------------------------------------------------------- > There was a good book about this I recently read > called “The Greatest Trade” ever. It follows John > Paulson, two other hedge fund managers, and a > trader as Credit Suisse who all figured out what > was coming and profited huge by it. What I liked > was how the author details not only what they did > but also why they did it. It’s also important to > note none of these managers / traders were of the > “permabear” variety. I have to check out that book, I’ve heard the title. Agreed though, there were several people that saw it coming. However, they all acted differently, “saw it coming” at diff time periods, and “saw it coming” to variable degrees. I think a lot of people thought it was going to be bad, but most didn’t think it was going to be THIS bad…potential wiping out Wall Street and ruining the entire/global financial system. What happened was and still is inconceivable…this was the worst destruction in finance that anyone has ever seen…worst than the 1930’s, but thanks to government intervention throughout the world, etc…the destruction was mitigated.
I think the real question that I struggled with before the crisis and still don’t have an answer to is: “If you know that you’re in a bubble, and you have client assets to manage, how do you keep your clients while your competitors are rushing to the pop without exposing yourself excessively to the downside when the pop actually happens.” You need some kind of portfolio / derivative structure that will pays off exponentially on down movements. So that sounds like out-of-the-money puts, perhaps paid for by selling out-of-the-money calls.
bchadwick Wrote: ------------------------------------------------------- > I think the real question that I struggled with > before the crisis and still don’t have an answer > to is: > > “If you know that you’re in a bubble, and you have > client assets to manage, how do you keep your > clients while your competitors are rushing to the > pop without exposing yourself excessively to the > downside when the pop actually happens.” > > You need some kind of portfolio / derivative > structure that will pays off exponentially on down > movements. So that sounds like out-of-the-money > puts, perhaps paid for by selling out-of-the-money > calls. If you know you’re in a bubble, my move would be to get out. But, you did mention that you want to keep your client so you suggestion of buying puts funded by calls would be agreeable. However, the toughest part of this whole thing is, are you in a bubble? most don’t know they’re in a bubble hence the bubble. this is why value investing makes sense and makes the job so much easier. You don’t have to worry about bubbles or what not when you can value the business. once it goes above a point of rationality, sell.
Value investing can be a problem in a bubble, because all valuations start look too expensive. You then go to cash (if your mandate even allows you to) or short (dangerous because the market can be irrational longer than you can be solvent). A number of value investors did poorly for many years during the tech bubble. Bill Miller got slammed during the crash and the year that preceded it. You can (maybe) still do value investing in a market neutral way by trying to short out the market exposure of your value buys, but if you are a true value investor, you simply don’t find any value buys, period, and then you start to lose clients because you underperform everyone else. I guess good communication with your clients is the key.
The thing is a lot of clients you can’t move even if you knew. I figured it was gonna blow and sold all my stuff by YE07. I think some guys I knew at Blackrock thought it was gonna blow too, but what are they gonna tell the life insurance clients they manage, “yeah you guys should sell you $20B bond portfolio and go cash”. Yeah they should, but they can’t due to restrictions, and even if they could it would crash the market. So they just bite it.
Thing is, it doesn’t take a genious to figure out what is under/over valued. What is very hard / luck, is to know when the market will stop being irrational, like the HF manager mentionned a few posts above who shorted the RE market too early in 2005. Sorry to bring in an obvious and overused quote, but :“the market can remain irrational longuer than you can remain solvent”. I think it’s more about timing than about fundamentals.
A mate of mine said he has been predicting economic collapse for the last 8 years. go figure
Michael Burry John Paulson these guys know what’s up!
bchadwick Wrote: ------------------------------------------------------- > Value investing can be a problem in a bubble, > because all valuations start look too expensive. > You then go to cash (if your mandate even allows > you to) or short (dangerous because the market can > be irrational longer than you can be solvent). A > number of value investors did poorly for many > years during the tech bubble. Bill Miller got > slammed during the crash and the year that > preceded it. > > You can (maybe) still do value investing in a > market neutral way by trying to short out the > market exposure of your value buys, but if you are > a true value investor, you simply don’t find any > value buys, period, and then you start to lose > clients because you underperform everyone else. > > I guess good communication with your clients is > the key. I definitely agree with Short positions being risky from the time horizon factor. However, not all stocks will be expensive though the universe does shrink drastically. in the tech bubble, many of the staple stocks were not excessive and there were plenty of old industry stocks selling at reasonable prices. value investing did poorly on a relative basis during the bubble. It did not do poorly overall. Some (the good ones) were still able to get 10-15%. However, when everybody is doing 30+, you start to look bad. One of the tenets of value investing is that you’re investing on an absolute basis. Buffet under performed the index , yet his results were still solid on an absolute basis and I guess that is what really counts in the long term. But you’re right, communication is key.
The people who saw it coming made money off of it. For those who ‘saw it coming’, wrote about it, and did not trade on their insight, well, lets just say that actions and profits are stronger than words.
If you “saw it coming” but didn’t make a dime from it, you really didn’t see anything. it’s an easy attempt to sound smart, but in this world, ppl want proof. talk is cheap. After all, if you saw a car racing towards you, wouldn’t you get out of the way? To me, its actually worst when someone didn’t do anything if they saw it coming.
FrankArabia Wrote: > To me, its actually worst when someone didn’t do > anything if they saw it coming. Couldn’t agree more with this statement. I want to punch every fing person that says this to me! Its like they’re trying to say “oh look at me, I’m so fukking smart!” well if you’re so fukking smart why do you still live in your parent’s basement?
adavydov7 Wrote: ------------------------------------------------------- > Its > like they’re trying to say “oh look at me, I’m so > fukking smart!” well if you’re so fukking smart > why do you still live in your parent’s basement? Lol.