Investors' Flawed Trading Habits

Barron's had a quick read about mutual fund investors costing themselves basis points of return because of various, flawed trading habits. The article wasn't very interesting but there was a comment worth digging in on. Always read the comments. 

This reminds me of the comment left on the original blog during the Financial Crisis that I've referred to countless times. He said just put it all in Hussman and forget it. I don't know which Hussman fund he meant so here are both of the big ones

Arguably, HSTRX netted out to a decent absolute return type of result in terms of being close to inflation which could work for people who are far ahead of where they need to be but that's a long time to not look like the stock market for any investor who need normal stock market growth for their financial plan to work. 

For anyone who doesn't know, John Hussman is a permabear who does a great job of framing the prevailing bear case. His funds have a very defensive tilt, they do well during times of crisis and I'd say never really look like the stock market which I'm pretty sure is not the objective. 

I think the blog reader from 16 +/- years ago and the Barron's commenter are both exhibiting a variation of hindsight bias where they expect funds that had good results when markets did poorly to also do well when markets do well and that is a bad bet. Managed futures really struggled for years between the Financial Crisis and 2022. The diversification benefits made the sense the whole time but "put it all in managed futures and forget it would have been a terrible idea. 

Similarly, client and personal holding BTAL spends a lot of time going down because it is negatively correlated to the asset that goes up, most of the time, of course I mean equities. BTAL did well in 2022 and surprisingly it is having a good year in 2024 but "put it all in BTAL and forget it" is a terrible idea.

A little into managed futures and a little into BTAL and I think you're onto something but I can't overstate what a bad idea putting it all into either one would be.

Calling the "crash" on August 5th, it was a little longer than one day I realize, The Great Hiccup of August, 2024 appears to be holding up, like this could be one of the many small declines that investors end up forgetting. 

There was utility to the event though in terms of how various diversifiers did and why. You can't know what a diversifier will do but you can have a decent idea. All of the symbols in this chart and names we use for blogging purposes and of course, BLNDX and BTAL are client and personal holdings. 

We did a similar exercise in the immediate aftermath before we knew whether Great Hiccup would stand up or not. The negative correlation of BTAL is more of a direct effect, stocks go down then BTAL which shorts higher volatility names will probably go up. Managed futures has more moving parts. If stocks had gone down for some reason other than an unwind of the carry trade then managed futures probably would have gone down less. It was also wrong footed on equities and bonds. In a different scenario, stocks could go down but managed futures could go up like BTAL did. As we've said many times, managed futures uses slower signals than fast market declines so a result like we saw in the Great Hiccup is well within the range of outcomes for a short term event. 

The Alpha Architect Tail Risk ETF (CAOS) did well for a couple of days and then gave it all back. I said in an earlier post that I think some sort of active decision was made to make the fund more sensitive to short term market movement. Maybe they reversed whatever they did and it is back to being a horizontal line. So we're back to thinking CAOS is a cash proxy that may or may not offer tail risk protection which isn't much of a conclusion.

I threw in ReturnStacked Stocks and Managed Futures (RSST) to frame out how the leveraged used can work when both equities and managed futures go down. Sized appropriately, that might not be such a big deal but my hunch is plenty of holders, it has a lot of AUM, go too heavy and make events like The Great Hiccup tougher than it needs to be.

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