Pundits, coin tosses and typing monkeys

There is a famous broker story, probably apocryphal, that makes the rounds every few years as though it had just happened. It goes like this: a new, struggling broker buys a mailing list of 10,000 potential prospects. They then write two separate newsletters about the same, high beta stock. One newsletter advises a leveraged short of the stock and is sent to half of the list or 5,000 prospects. The other newsletter suggests a leveraged buy of the same stock, and is sent to the other 5,000. A month later, the prospects that got the newsletter touting the wrong side of the trade are discarded. The 5,000 that were on the right side are split into two groups and the same process is repeated with a different stock. At the end of four months, the broker has a list of 625 prospects who can’t believe their luck in finding the next Michael Burry, and will spend the next ten years wondering why, after they transferred their life savings, the magic disappeared.

Remember this story every time you see a “hot” pundit in print or on business television. Punditry is binary, stocks can only go up or down (“unchanged” is declared a win by both bulls and bears) and is in this way similar to a coin toss, at least in the sense of probability. The odds of getting four calls in a row are actually pretty low, (0.5*0.5*0.5*0.5 or 6.3% probability). But, there are enough typing monkeys begging for time on CNBC or Bloomberg that at any given time, someone at least is on this kind of “tear”.

Another, somewhat related issue that because solid, long-term performance attracts assets on its own, the managers begging most vociferously for airtime are those with poorer performance – if they had really good numbers they would be less in need of publicity.

None of this is to suggest that every manager we see on television is a charlatan, its just two more trends representing potential hurdles in the way of investors searching for managers that are actually good at their jobs and not just rolling the dice. Past performance, we are taught, is no indicator of future returns, but they are, I would argue, much more reliable than a four month hot streak.

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5 thoughts on “Pundits, coin tosses and typing monkeys

  1. [...] Beware the managers of financial TV begging for assets.  (Interloper) [...]

  2. PD says:

    Since this blog is written anonymously, could you share your candid and balanced thoughts about a well-known fund manager who outperformed the S&P500 for every calendar year period for more than a decade–only to “lose” all that outperformance towards the end of his managing that fund.

    What does or could this say about:

    –Fees vs fund investment returns incentives for the fund manager and his advisory firm?

    –Investors’ true experience vs theoretical IRR calculations as the fund manager’s “peak performance” coincided with his peak assets managed?

    –Whether the number of days it takes the Earth to circumnavigate the sun is an appropriate metric period for an investment portfolio?

    –Broad equity market index funds outperforming over 75% of active equity fund managers in almost any given year?

    –Where are the customers’ yachts as (without a touch of envy) the fund manager bought a very nice one himself?

    –Whether a nebbish looking 401K equity fund manager charging 150bps (before entry and exit loads and broker fees, of course) on a fund that will probably return no more than 10% before taxes over its life is really that much of a bargain over a Gekko-casting-central inspired moussed-up hedge fund manager?

    Don’t want to sound cynical as these questions are worth pondering. Your thoughts?

  3. Pat Burns says:

    I’ll address one of the questions that PD raises. Comparing a fund to an index tells us much less than we tend to think it does. Such a comparison can make the fund manager look better or worse than it should depending on the circumstances. There are much more powerful ways to assess the skill of fund managers — see http://www.portfolioprobe.com/2011/11/16/performance-measurement-is-about-decisions/

  4. [...] On the absurdity of "hot hands" and the picks of pundits.  (Interloper) [...]

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