Thursday, May 17, 2012

Ira Sohn Conference Results

I wasn't really aware of the Ira Sohn Conference, but some very big names were there. As Richard Posner pointed out, however, intellectual reputation invariably lags achievement, so the biggest names almost by definition are over the hill. A great example of this was Ronald Coase, who remarked upon winning the Nobel Prize in 1991, "it is a strange experience to be praised in my eighties for work I did in my twenties."

 In any case, last year's recommendations generated an average return of -8%, but the year prior was up 22%.  Thus, net over two years they returned a little less than the S&P500 over that period, adding yet another datapoint to the observation that advisers slightly lag the passive indices. On the bright side, Jim Chanos had two home-run picks--shorting VWS and FSLR--which will probably be sufficient to generate hope that while on average these recommendations are no good, if you pick the right ones, you can make a fortune. 

Such is the perennial problem with advice, in that on average it is unhelpful at best. Like education in general, trying to obtain wisdom given everything people have done and written is not straightforward. Surely reading such information is essential because no one could come up with all those insights by themselves, but unfiltered such data is no more informative than pop culture.  A lot of people with good intuition actually start ignoring such advice rather early because they see the diminishing marginal returns, why humans clearly become wiser from 0 to 30 then pretty much level off on average.  I suspect it's like Sturgeon's law (ie, 90% of everything is crap), in that those who like to take a lot of advice or read a lot includes some who are very wise and who have learned much from the past and others; but most highly educated people don't understand that they aren't necessarily becoming wiser because they choose the bad gurus, or build upon bad assumptions. 


JWO said...

One thing though that is always in head is that if everyone did passive index investing the market would loose its mind.

Eric Falkenstein said...

true, but currently I think too many don't index passively. If it gets to 99% ETFs, clearly that would be an insane market.

Anonymous said...

So, all one has to do is

a) Invite the "right" managers to the conference, then,

b) Discern the "right" picks from their already supposedly wonderful set of picks

c) Take huge idiosyncratic risk betting on these "right" picks

Simple! Active managment is easy!

fr said...

Smart investment advice must always identify who is the dumb money on the other side of the trade and also explain why the dumb money is dumb. Did Chanos explain who the dumb money was that was long FSLR and why this dumb money was long FSLR? If not, then Chanos either held back some information (possibly inadvertently) or he just got lucky shorting FSLR.

Here some good advice from FrankR that does identify dumb money that can be traded against. AFTER the market indices (Dow, SP500) have gone up, the small fry get interested in buying stocks, and conversely they get interested in selling AFTER the market has gone down (like right about now). The small fry invests like this consistently, for complex psychological reasons. It is possible to gain alpha by simply systematically taking the other side of the dumb money buy high/sell-low trade. How much alpha? John Bogle has been pontificating lately about "69 percentage points" lost by retail investors because they didn't invest passively (I'm not sure of the time frame or other details of this 69 percentage points). Well, that's 69 percentage points that someone else gained (less bid-ask spreads, brokerage commissions and market impacts, all of which should be negligible for someone trading SPY).