Paying for performance

Matt Levine on charging higher fees for increased performance. It’s not looked upon well, which doesn’t make sense.

One mental model you might have is: Shouldn’t the active managers’ share of the pie be reduced by competition? If Fund X outperforms by 60 basis points but takes 44 for itself, shouldn’t Fund Y swoop in and offer to outperform by 60 basis points but take only 30 for itself? Just asking the question makes it obvious that the answer is no. Sure, right, if lots of active managers could predictably outperform, then they might compete with each other on price. But as long as reliable outperformance is rare, investors should rationally prefer to pay a lot for outperformance rather than to pay less for underperformance.

Full post Is Paying for Performance Bad? at Bloomberg.com

The first rule to catching a bottom? Don’t try to catch a bottom

Michael Batnick, on attempting to catch a bottom, in a post from last July:

Nobody can actually buy low and sell high. Not consistently anyway. Successful traders typically buy high and sell higher, and successful investors buy low and sell rarely. But if you are tempted to catch bottoms, to be the investor who can recognize treasure where others find trash, there are some broad rules that I suggest you follow.

The first rule to catching a bottom? Don’t try to catch a bottom.

The first rule of catching a bottom is don’t try to catch a bottom. It’s one of the hardest things to do in all of investing. Macy’s has experienced three separate 30% rallies on its way to a 70% decline. None of them stuck. Quick traders made money. Bottom-fishing investors got filleted.

Here’s one way to do so:

Rule #4: Wait for a longer-term moving average to stabilize. Macy’s twelve-month moving-average, for example, is still crashing. If you wait for a long-term moving average to stabilize, you won’t buy at the bottom, but better safe than sorry. Falling knives are guilty until proven innocent.

Good reminders when instincts are telling you differently. Read his full post Ten Rules For Catching A Bottom at The Irrelevant Investor.

Being too cautious can be costly in investing

Ben Carlson on the false narrative of all-time highs resulting in a crash. There’s a lot of talk about the market being ready for a correction simply because things are going well.

Here, Carlson quotes a myth from his own book, publishedin 2013:

Of course, stocks can fall from all-time highs, but hitting an all-time high isn’t necessarily the trigger that causes them to fall. Since 1950, there have been over 1,100 all-time highs reached on the S&P 500. That’s good enough for almost 7 percent of all trading days or roughly one out of every 15 days that the market is open. Here is the breakdown by decade that shows how often the S&P 500 hits a new high level:

He then goes on to give some numbers on what’s happened since then:

Since new highs were hit in 2013 there have been 201 new ATHs in total. This year alone there have already been 13 new all-time highs on the S&P 500, the same number that was seen in the entire decade of the 2000s. It’s not even the end of January.

Stocks are already up almost 8% this year and that’s after 9 straight years of gains (with 7 of those annual returns in double-digit territory). It’s been almost 20 months since we saw a 5% correction.

A good reminder that being cautious can be costly too. Rad his post All-Time Highs, Risk & Consequences at A Welath of Common Sense.

Stick to familiar companies

Good reminder from Howard Lindzon to stick to what you know when it comes to investing. Buffett stresses this in his investment philosophy as well.

Valeant never interested me on the way up. Pharmaceuticals and biotechs are too complicated for me to understand. Wall Street and greedy executives take advantage of these complications.

via Dirty Money and Pharmapalooza at Howard Lindzon