Bloomberg wrote about what looks like the unraveling of the Yale Model which of course the illiquid alt focused strategy that David Swensen is credited with deriving starting in the 1980's. As Bloomberg tells it, the beneficial effect of private equity and venture investing has deteriorated. We've looked at the Yale endowment countless times. It's interesting for learning about what alts can do but then it is also a useful lesson about having too much in alts, the extent to which illiquidity is unnecessary for retail sized accounts and the problems that arise from having too much complexity in your account.
A lot of simplicity hedged with a little complexity.
Speaking of complexity, Jeff Ptak had a good writeup about what sort of complex (my word) funds are worth paying up for and which ones are not worth it. Although not that complex, he thinks target date funds are worth it for an interesting reason.
Morningstar writes frequently about the gap between the returns for funds versus the return investors of those funds get which is less due to various behavioral mistakes. We talk every so often about ergodicity (long term, the market is going to go up with you or without you so you might as well go along for the ride). Target date funds rebalance for you (glide path) so there are fewer reasons to sell so you better capture the long term result says Ptak. To the extent the concept of a gap strikes a cord, holding on for a long time is obviously how the gap is overcome.
Look at something like Amazon or anything else that is up a bazillion percent over the long term. As we talked about recently, there have been some hideous declines along the way but throughout those hideous declines people didn't stop ordering stuff or lately watching the streaming service. The next time the S&P 500 drops by 25% and Amazon cuts in half, we still will be buying stuff and watching the streaming service. Yes I am aware that AWS accounts for 20% of revenue and 60% of earnings. Chances are the AWS numbers will grow faster than the rest of the company. That all sounds great but the next time the S&P drops by 25%, I would expect Amazon to cut in half. Last April, Amazon fell 30% versus 18 or 19% for the S&P.
Holding on isn't easy but sitting here, close to all time highs, you know it's the right thing to do. It will be the right thing in the middle of the next panic too. Usually. Owning individual stocks requires being able to discern when something has changed in such way that the company won't recover from. However infrequently stocks need to sold, funds even less so. The point of all of Ptak's articles about the gap is do less. Do less.
Alpha Architect cited a study about new retirees trading more as a result of having more time on their hands. Turns out that doesn't go very well. Do less.
Here's another good example about thinking short term with a high likelihood of ending badly from Bloomberg. Investors, Bloomberg says, see an opportunity in long term treasuries because the yields are toward the upper end of where they've been in quite a while. Ok, but yields are below 5%. Do you think you have an edge figuring where rates are headed? I certainly do not. Assessing that the compensation isn't worth the risk (that describes my view) is not the same thing as making a prediction about where rates are headed.
Here's a fun one to close out with. The optimal exposure for Bitcoin in terms of weaving into a portfolio to improve the Sharpe Ratio is......a negative exposure. That is the conclusion of Alistair Milne. You can decide for yourself but in terms of trying to model it in, much of its track record is not repeatable. In 2013 it was up 5400%. That's not going to happen again. In 2017 it was up 1400%. That's not going to happen again. In 2020 it was up 308%. A repeat of that would surprise me but maybe that's possible but it is also possible that turns out to be essentially worthless too.
I've owned for a long time because of the asymmetric potential. I am not a true believer. Before the link today about negative exposure, I've made the point about backtesting it too far as being worthless because of the unrepeatable performances. I won't say don't own it but I see a lot of content from the fund providers about all of these RIA looking to make allocations and do some modeling. It's all worthless. It might go into the millions or it might crap out but there is no modeling it.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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