Value Investing using Economic Value Added (EVA)

Some Perspective 10% per Year « Systematic Relative Strength

 Some Perspective « Systematic Relative Strength.

That’s right – still 10.09% annualized return over a stretch of nearly 92 years that saw horrible world wars, peace, booming economies, depressions, good politicians, bad politicians and everything in between.

We will be the first to admit that indexing may not be appropriate for everyone.  In fact, many of our products follow a methodology that seeks to rotate into other asset classes during extended periods of weakness in U.S. equities. However, it hard to look at the table above and not realize that the stock market offers the masses access to one of the most effective ways to build real wealth over time known to man.

It would be a tragedy if we stopped investing in the stock market and fell short of our life goals because of the returns of the last decade.

We understand it is human nature to be frightened by short-term volatility, but the short-term does not matter for your savings as long as you do not need the money when we are in one of those temporary periods of decline.

The market goes up and down. Yes.  That is technically accurate. A more accurate statement is that the market goes up a lot and down a little - but it always goes up over time.

At my firm, Berk Advisory, we know that the biggest factor in determining your lifetime return is your behavior concerning short-term volatility.  Our clients buy low and sell high and never panic so much that they get off their long-term plans.

BERK

This just in: Hedge funds pay banks millions for ‘edge’

I am shocked, sir, to find out insiders pay for inside information! Just shocked! 

Here's a brilliant piece of journalism the likes of which we unfortunately expect nowadays.  We need to wait for someone to get "busted" before anyone investigates the way it's always done:  This from the FT this morning.

Galleon, which had about $7bn in assets at its peak, paid large amounts to banks because it specialised in short-term trading strategies, which put its officials in close contact with Wall Street traders and salespeople. As it grew, the hedge fund became known for pushing its contacts at banks for hints about market developments such as big buy and sell orders.

Although bank policies often prohibit employees from divulging specific information about orders, executives who dealt with Galleon said it regularly received “colour” on market developments, frequently delivered in Wall Street slang. One example would be tradersdiscussing a “page one seller” of shares – a reference to the first page of the Bloomberg list of top holders of listed companies. (My Emphasis)

One executive who dealt with Galleon said: “They wanted anything the public did not have. They got various pieces and put them together and that was their edge.” A former Goldman executive who provided services to funds including Galleon said: “They were tough and aggressive. They cared about short-term returns and cared a lot about the impact of their trading and the costs. They expected a lot of market information.”

Market “colour” has not usually figured in insider-trading enforcement. Prosecutions – including the charges in the Galleon case – have focused on leaked corporate information.

FT.com / Companies / Financial Services - Galleon paid banks millions for ‘edge’.

Insiders, like the proprietary traders at Goldman Sachs, Morgan Stanley, etc., are the ultimate insiders because they know what their customers are doing - they then can bet ahead or bet against depending upon what the market "color" says. 

Hedge funds that trade a lot share that information and become quasi insiders because they get a bit of that insider market information that allows the hedge funds to get an edge.

In the end, it's the way business has been done since I can remember - but it ain't right to the extent that these hedge funds and prop traders make their dough, their out-performance, through inside information.  I'll let the government figure out if it's legal, but it is not fair when the only way to gain the edge is to pay off your brokers with commissions.  And it ain't fair that these hedge funds and traders are thought to be "brilliant" investors when much of their out-performance comes from being on the inside.

How come we never see the big payoff to Wall Street as a reason for the glorious performance this quarter in their famous letters to partners?  I guess it would go something like this: 

We had a great quarter because our investment in commissions at Goldman Sachs gave us the edge in a number of stocks that were being liquidated by Fidelity and T Rowe Price.  Also, we surmised from our conservations with the proprietary traders at our brokers that insiders at pharma companies were selling in large numbers which enabled us to sell ahead of them.  Next month I'll figure out an explanation as to why they were bailing out, but no matter we made a fortune. 

Regards,

Hedge Fund Guy

BERK