I don’t know about you, but I learned about investing in the 1990s reading the letters of Buffett and various other value investors. One thing that I can’t help but wonder is how different my approach to investing would be if I just got tuned into it in the last 10 years.
In the 1990s it was very easy to buy stocks for the long run. We were in the middle of an extended bull market that started in the early 1980s. Investing was pretty easy, buy stocks and hold them. Make money.
The past 10 years have been exactly the opposite. Buy stocks and make nothing. Or worse yet, buy the wrong sector and lose a lot of money.
Whereas buy and hold was what we learned in the 1990s. Now we have the incredible stories of the select few investors who made scads of money betting on catastrophe. Nothing is more fascinating than being one of the smart guys who bets against all the lemmings who simply pour money into stocks.
Thus the growing popularity of the “Black Swan” funds that pay out big if disaster hits.
I came across the following article about an investor who has hit it big investing using this style, I wonder how continuing investing in this style will do for him over the next 10 years. Since buy and hold is now completely out of style, instincts tell me it might be the strategy to employ over the next decade.
Here is the article:
Mark Spitznagel pushes the throttles on his new twin-engine Chris-Craft Corsair 28, slicing through Grand Traverse Bay in northern Michigan on a warm day in late July. As the speedboat reaches more than 50 miles per hour, Spitznagel’s blond hair flying in the wind, he churns up a big wake.
Turbulence is where Spitznagel, the founder of hedge fund Universa Investments LP, thrives. On Aug. 4, while Spitznagel is still at his lake house, the Standard & Poor’s 500 Index begins to plunge as weak economic data prompt predictions of a double- dip recession. By noon, Spitznagel, a so-called black swan investor, has spoken with his Santa Monica, California-based firm 15 times by phone to capitalize on its positions to make money while other investors lose it, Bloomberg Markets magazine reports in its November issue.
At Universa’s office, between conversations with Spitznagel, two traders frantically buy and sell derivatives, including options on the S&P 500. The index’s 4.8 percent dive on that day is producing a windfall for Universa, says Brandon Yarckin, a Universa associate who handles investor relations. He points to a Japanese print on the wall -- one of Spitznagel’s favorites -- depicting a giant wave about to crash onto a group of hapless fishermen.
“Days like today are what we are here for,” he says.
Investors are pouring into doomsday black swan funds, spurred by the spreading European debt debacle and Standard & Poor’s downgrade of U.S. creditworthiness. The funds entice investors with the possibility of a huge payoff if a crisis hits; Universa returned about 115 percent to investors in 2008, according to a person familiar with the matter.
‘Stupidly Expensive’
This year, as markets retreated, Spitznagel’s team collected gains of 20 to 25 percent through August for its 11 sovereign-wealth-fund and institutional clients, whose investments are run in separate partnerships and managed accounts.
“I couldn’t be more bearish on the stock market right now,” Spitznagel, 40, says. “The stock market has gotten stupidly expensive again. Fortunately, with our position, I don’t have to time the next sell-off.”
The downside of black swan investing can be steady pain -- year after year of losses if a market catastrophe doesn’t occur. In both 2009 and 2010, Universa’s clients lost about 4 percent, according to the person. The hedge-fund industry had a 9.2 percent gain in 2009 and an 8.2 percent return in 2010, according to the Bloomberg aggregate hedge-fund index.
Investment Fad
Some managers dismiss black swan funds as a costly investment fad. Philippe Jorion, a managing director in the risk management group at Pacific Alternative Asset Management Co., a fund of hedge funds, compares this form of hedging with homeowners’ insurance: The premiums paid by the homeowner usually exceed the benefit over time.
On top of the ongoing losses, black swan hedge funds typically charge a 1.5 percent management fee and take 20 percent of any profit.
“The problem we have is that these hedging strategies tend to do well only when volatility is high,” says Jorion, who’s based in Irvine, California. “But over the long run, there can be stretches over many years where these strategies are expensive to run and bleed money.”
Nassim Nicholas Taleb coined the term black swan as a metaphor for an unforeseen catastrophe, such as the implosion of hedge fund Long-Term Capital Management LP in 1998 or the terrorist attacks of Sept. 11, 2001. The author and New York University professor has helped inspire a cottage industry of disaster funds.
‘The Black Swan’
His most well-known book, “The Black Swan: The Impact of the Highly Improbable” (Random House, 2007), has sold more than 3 million copies. His latest book dispenses wisdom via aphorisms. In “The Bed of Procrustes: Philosophical and Practical Aphorisms” (Random House, 2010), he writes, “In science, you need to understand the world; in business, you need others to misunderstand it.”
Link to entire article: http://mobile.bloomberg.com/news/2011-10-06/black-swan-money-manager-returning-23-anticipating-bear-market?category=%2F
In the 1990s it was very easy to buy stocks for the long run. We were in the middle of an extended bull market that started in the early 1980s. Investing was pretty easy, buy stocks and hold them. Make money.
The past 10 years have been exactly the opposite. Buy stocks and make nothing. Or worse yet, buy the wrong sector and lose a lot of money.
Whereas buy and hold was what we learned in the 1990s. Now we have the incredible stories of the select few investors who made scads of money betting on catastrophe. Nothing is more fascinating than being one of the smart guys who bets against all the lemmings who simply pour money into stocks.
Thus the growing popularity of the “Black Swan” funds that pay out big if disaster hits.
I came across the following article about an investor who has hit it big investing using this style, I wonder how continuing investing in this style will do for him over the next 10 years. Since buy and hold is now completely out of style, instincts tell me it might be the strategy to employ over the next decade.
Here is the article:
Mark Spitznagel pushes the throttles on his new twin-engine Chris-Craft Corsair 28, slicing through Grand Traverse Bay in northern Michigan on a warm day in late July. As the speedboat reaches more than 50 miles per hour, Spitznagel’s blond hair flying in the wind, he churns up a big wake.
Turbulence is where Spitznagel, the founder of hedge fund Universa Investments LP, thrives. On Aug. 4, while Spitznagel is still at his lake house, the Standard & Poor’s 500 Index begins to plunge as weak economic data prompt predictions of a double- dip recession. By noon, Spitznagel, a so-called black swan investor, has spoken with his Santa Monica, California-based firm 15 times by phone to capitalize on its positions to make money while other investors lose it, Bloomberg Markets magazine reports in its November issue.
At Universa’s office, between conversations with Spitznagel, two traders frantically buy and sell derivatives, including options on the S&P 500. The index’s 4.8 percent dive on that day is producing a windfall for Universa, says Brandon Yarckin, a Universa associate who handles investor relations. He points to a Japanese print on the wall -- one of Spitznagel’s favorites -- depicting a giant wave about to crash onto a group of hapless fishermen.
“Days like today are what we are here for,” he says.
Investors are pouring into doomsday black swan funds, spurred by the spreading European debt debacle and Standard & Poor’s downgrade of U.S. creditworthiness. The funds entice investors with the possibility of a huge payoff if a crisis hits; Universa returned about 115 percent to investors in 2008, according to a person familiar with the matter.
‘Stupidly Expensive’
This year, as markets retreated, Spitznagel’s team collected gains of 20 to 25 percent through August for its 11 sovereign-wealth-fund and institutional clients, whose investments are run in separate partnerships and managed accounts.
“I couldn’t be more bearish on the stock market right now,” Spitznagel, 40, says. “The stock market has gotten stupidly expensive again. Fortunately, with our position, I don’t have to time the next sell-off.”
The downside of black swan investing can be steady pain -- year after year of losses if a market catastrophe doesn’t occur. In both 2009 and 2010, Universa’s clients lost about 4 percent, according to the person. The hedge-fund industry had a 9.2 percent gain in 2009 and an 8.2 percent return in 2010, according to the Bloomberg aggregate hedge-fund index.
Investment Fad
Some managers dismiss black swan funds as a costly investment fad. Philippe Jorion, a managing director in the risk management group at Pacific Alternative Asset Management Co., a fund of hedge funds, compares this form of hedging with homeowners’ insurance: The premiums paid by the homeowner usually exceed the benefit over time.
On top of the ongoing losses, black swan hedge funds typically charge a 1.5 percent management fee and take 20 percent of any profit.
“The problem we have is that these hedging strategies tend to do well only when volatility is high,” says Jorion, who’s based in Irvine, California. “But over the long run, there can be stretches over many years where these strategies are expensive to run and bleed money.”
Nassim Nicholas Taleb coined the term black swan as a metaphor for an unforeseen catastrophe, such as the implosion of hedge fund Long-Term Capital Management LP in 1998 or the terrorist attacks of Sept. 11, 2001. The author and New York University professor has helped inspire a cottage industry of disaster funds.
‘The Black Swan’
His most well-known book, “The Black Swan: The Impact of the Highly Improbable” (Random House, 2007), has sold more than 3 million copies. His latest book dispenses wisdom via aphorisms. In “The Bed of Procrustes: Philosophical and Practical Aphorisms” (Random House, 2010), he writes, “In science, you need to understand the world; in business, you need others to misunderstand it.”
Link to entire article: http://mobile.bloomberg.com/news/2011-10-06/black-swan-money-manager-returning-23-anticipating-bear-market?category=%2F
