Columns · investing

The Curse of Star Managers

I edit more and write less these days, but even when I do write I often forget to link to it here. I’ll try to be better in 2021.

One thing I wrote recently generated an unusual amount of reader email, split about 40-60 between congratulatory and outraged. I said that star fund managers are to be avoided and I used the example of Cathie Wood, whose main exchange traded fund at ARK Invest grew assets by 1,000% last year and gained nearly 160%. She bet big and won on hot stocks like Tesla and biotechs that benefitted from Covid-19 speculation.

I am apparently a misogynist or don’t understand her genius or both. Anyway, the evidence is pretty strong that jumping on the bandwagon once a fund manager graces magazine covers isn’t a great idea whether that manager has a “Y” chromosome or not. You can read more about managers like Ken Heebner and Bill Miller in my book.

The column starts out with a “famous last words” puff piece from The Motley Fool titles “Move Over, Warren Buffett : This Is the Star Investor You Should Be Following.”

So read the headline on a year-end article from retail investing advice site Motley Fool touting the performance of fund manager Cathie Wood. Variations on the “Buffett is done” theme have been around since at least the tech bubble, while the cult of star mutual-fund managers goes back to the 1960s. Such commentators have eventually eaten their words.

Ms. Wood is a savvy businesswoman, but is she a savvy investor? Stock picking skill is very rare and even harder to discern when the manager is riding a hot category. In a bull market propelled by dumb retail money, everyone is a genius. It takes many years to establish whether success is random. And, as I point out, star manager’s performance is often worse than random on the downside. The most promising active funds are those that lagged their peers recently or got a low rating from a firm like Morningstar.

Fund managers are often compared with dart-throwing monkeys. That might be too flattering for those who get the most attention. Hot funds’ performance is often worse than random on the downside. A regularly updated study on the persistence of investor performance from S&P Dow Jones Indices shows that just 0.18% of domestic equity funds in the top quartile of performance in 2015 maintained that through each of the next four years—less than half what one would have expected by pure chance. And of course most actively managed funds lag behind the index to which they are benchmarked because of fees and taxes.

Anyway, the tone of the emails has made me more convinced that some investors in “disruptive innovators” have lost touch with reality. Congrats if you were early — the fund’s performance is pretty impressive (see chart below) — and be careful if you were late.


We’re About To Get Schooled

The origin of the phrase “hope is not a strategy” is disputed, but I generally hear it in a business context. I get the feeling that educators are going to become acquainted with it pretty soon.

By this time in August, schools in much of the country are scheduled to be filled with teachers and students. Many universities will start a week or so later. Some will teach remotely, but most are still slated to be in-person or some hybrid thereof. As the dad of kids in both high school and college and the husband of a school employee, I’ve been privy to the plans — if you can call them that — of the superintendents and provosts.

There was a peculiar kind of cognitive dissonance on display early in the Covid-19 pandemic by educators. Of all people, they’ve failed to learn. Back then I contacted the local superintendent and the college provost as cases were spreading about when they planned to send kids and teachers home. The answers were “it’s still rare here” when there was almost no way to get tested and when epidemiologists were warning that it was spreading exponentially. 

That fear of looking dumb or alarmist repeated across thousands of districts and campuses probably cost thousands of lives. It’s somewhat excusable because it was hard back in February or early March to imagine what the world would look like just weeks later. 

But what about now? Decision-makers all certainly know the meaning of “exponential” if they didn’t before. The U.S. has had 145,000 confirmed Covid cases in just the past two days and almost certainly many more unreported ones as people face long waits to get tested in the Sun Belt. What is more, a higher share of those cases is from a young, working-age cohort. Some schools in Florida, which reported over 15,000 cases on Sunday, open in as little as 20 days. I’ve been following private forecasts by Qijun Hong, a postdoc at Brown University, who has been producing remarkably accurate infection models for several weeks. Here’s his latest for Florida.

This is for confirmed cases. Of those tested, very few are children, but this week we learned that an incredible 31% of children tested randomly in Florida were positive. Even if the number of new cases in Florida in August is just half as high as Mr. Hong is projecting, is that low enough to reopen schools? The answer is almost certainly “no,” and here’s why.

In the first month of school alone, about 1 in 60 Floridian adults would be diagnosed with Covid-19. A school with 500 kids will easily have 40 teachers, aides, principals, coaches, secretaries and janitors plus a handful more substitute teachers — all part of that potential pool. And then there are easily 1,000 more adults who live with or regularly see those children who also could be diagnosed. And don’t forget the spouses of those teachers, janitors, principals, and substitutes  — one of them could be diagnosed. Even if we assume that kids can’t spread the illness, the chances that at least one of those 1,100 adults doesn’t face quarantine or receive a diagnosis is tiny.

And if an asymptomatic teacher’s test is positive? With tests taking five or more days to come back, that employee will have had time to infect plenty of other adults and children. Will they all have to quarantine? And if they don’t, who wants to be the substitute teacher for the one who is positive? How many substitute teachers earn enough to take that risk and how many can the school system afford to pay? How sure are they that children can’t pass it on and at what age does it become more likely that they will? Try asking this question and getting a straight answer.

If the substitute starts feeling ill, will the system pay for his or her Covid tests or treatment even though they aren’t on the insurance plan? That substitute may have visited multiple schools, so which school is on the hook and will the teachers or students he or she met at each school then have to quarantine?

What if the first person diagnosed works in a middle school or high school? Well then he or she isn’t in contact with 25 kids daily but more like 125. In the case of a cafeteria worker it would be hundreds. What then? 

The schools tell us they are taking steps, including lots of extra cleaning and social distancing, but how effective will they be? Having half as many kids in a room at a time will help, and so will mandatory masks, but kids aren’t especially careful or sensible. Even 100% compliance with mask-wearing and hand washing only would reduce, not eliminate, contagion. We know that an infected person spending an hour at a party or bar can infect several people. Even if schools are half day, the period of exposure will be longer.

The odds of any given school not being touched by Covid-19 are a bit better in most other states, but not great. One-in-100 or even one-in-500 adults infected in a month still makes an infection at a given school quite likely. With perhaps a third of teachers in higher-risk categories because of age or medical history, it is unfortunately only a matter of time before some of them are on ventilators.

The situation could be even worse for colleges hosting young adults who are most certainly capable of passing on the illness and who generally lack a healthy appreciation of their own mortality. What happens when a student in a dorm of 150 tests positive? He or she will have been contagious for a while. Remember when a single sick person who left the Diamond Princess sparked a lockdown of everyone else in their cabins? Weeks later 691 people on board had it. That was with passengers confined to their rooms and being brought their meals. Will colleges deliver meals to the student? Whose job will that be? And what about shared toilet and shower facilities? How many positive tests in a building before everyone is sent home? Is a dorm being set aside only for those who test positive or will they just be sent home to infect their parents and siblings? And what about international students who can’t go home? Will airlines or Amtrak transport infected students anyway?

I understand why colleges are so eager to have students return in person: money. Empty dorms and students deferring will put even more financial strain on them. I also understand why primary and secondary schools are doing it: pressure from politicians and from parents worried about their children falling behind or about who will watch them while they work. Unfortunately, the plans to keep everyone healthy are vague and ad hoc and we still know too little about this disease.

Instead of hazy, expensive, and unworkable plans, how about doing some serious planning for a better remote learning experience in the fall while the world waits for a vaccine? Online learning in the spring was subpar, but it doesn’t have to be.

Columns · investing

Bear Markets

With apologies to Stanley Kubrick, I titled my latest Heard essay “How I Learned to Stop Worrying and Love the Bear Market.

It sounds a bit flippant at a time when so many people are seeing their nest eggs melt down on paper, but the message is important. Retail investors lag the market significantly because of timing errors and the biggest mistakes are made at junctures like these. If the 20% bounce from the coronavirus-fueled low turns out to be a dead cat bounce then it will stoke further pessimism and cause people to either sell or to have less of their wealth in risky assets such as stocks once the eventual turn comes.

I’d love to tell you when that turn will be, but I can’t and neither can anyone else. The important thing to remember, though, is that if you were comfortable having, say, 70% of your nest egg in stocks when the Dow was knocking on the door of 30,000 then you should feel the same way at 20,000 or (gulp) 15,000. The richest gains of the next bull market (no, I don’t think this recent bounce was the start of one) probably will come early on. They always have before.

For example, if you put $100,000 into a plain vanilla U.S. index fund at the very start of the last bull market in March 2009 and had sold at last month’s peak then you’d have $630,000 including dividends. If you had decided to wait three months to make sure it wasn’t another false alarm then you’d have just $450,000.

Bad times are surprisingly good. If you could go back in a time machine and buy stocks at the bottom of every bear market of the past 90 years but had to sell as soon as a recession had officially ended then your annualized return would be a whopping 64%. You would never have lagged the market’s long-run return.

And what if you really can’t sleep at night? Well that’s okay – Covid-19 is enough to worry about! But then you should do one of two things. One would be to dial back the risk you take permanently – no cheating the next time everyone around you is getting rich on pot stocks or whatever the next fad will be. You’ll be that much older and closer to retirement then anyway. The other would be to entrust your money to someone else like a reputable fee-only adviser or a robo-advisor like Betterment or Wealthfront and just check it as infrequently as possible.

Why should you (sort of) like bear markets? Because they’re the time when your attitude can make you a superior investor. Everyone is a genius in a bull market, but tough times are when your mettle matters – no finance degree or superior IQ required. When those glossy brochures from a brokerage firm tell you that the long run return of stocks is 9.6% or whatever, those returns include bear markets that have seen portfolios cut in half or worse.

That’s my usual spiel, which you can read about at length in my book as well, but it’s when I finish giving it and emphasize that nobody on Wall Street knows anything that someone inevitably asks what I think about the market anyway.

I used to get paid a lot to tell people which stocks to buy. Now I get paid a more modest sum to write and edit articles about the same thing. It doesn’t mean you should listen to me about what or when to buy. But, for whatever you may think it’s worth, I’m pretty pessimistic at the moment. If I hold to form then I’ll still be pessimistic when the turning point is reached and we all should be buying stock funds like crazy.


Paging Mr. Whipple!

I hear that toilet paper in Hong Kong is worth its weight in gold. Well it isn’t – I checked.

You hear it all the time when people talk about a luxury good or one temporarily in short supply: “It’s worth its weight in gold!”

Very few literally make the grade, though—particularly something an ordinary person might legally buy or consume. Rhodium and heroin don’t count. The latest product to attract the inaccurate label is humble toilet paper courtesy of the coronavirus epidemic, or rather the public reaction to it. A rumor in Hong Kong that supplies would be disrupted set off panic buying and shelves are empty. Supermarket chain Wellcome has instituted a purchase quota.

When shortages emerge bad guys soon sense an opportunity, and it was no different in the relatively crime-free city. Thieves stole 600 rolls with a retail value of $218.

Crime usually doesn’t pay, and it didn’t in this case, either. The thieves were apprehended. Had the rolls been literally worth their weight in gold, at least the effort may have been worth the risk. A typical 227-gram two-ply roll would have to be fenced for $11,895, though.

At that price, even a premium newspaper like this one would present an irresistible arbitrage opportunity for a bathroom-goer—and you could even read it first.


Cruise Companies Will Get Decked

I wrote about the cruise industry. There are often disasters or mishaps like the 2012 Costa Concordia accident or the Carnival “poop ship” in 2013 that produce temporary bargains for people brave enough to pounce on a cheap vacation deal or stock. The latest scary quarantines may be different, though.

There are threats aside from the immediate epidemic. The fact that the quarantines have occurred in Asia may do permanent damage to China’s embrace of cruising in what Carnival management has said it believes will grow into the world’s largest cruise market. About 4.24 million, or 15% of cruise passengers, came from Asia in 2018 according to the Cruise Lines International Association.When cruising was in its infancy in the U.S. it received a warmhearted P.R. boost from “The Love Boat” TV show that ran from 1977 to 1986. To would-be cruisers from China’s emerging middle class, scenes of ambulances and quarantines are leaving a far less heartwarming image than jolly Captain Stubing.


Oil and Coronavirus: Will There Be Blood?

I wrote about the tough times in America’s oil patch and how much tougher they have become since the coronavirus knocked about a fifth off of crude prices.

The oil market is more accustomed to dealing with supply shocks than collapses in demand. While strategic reserves can ease shortages, even the most eager Fed chairman or Treasury secretary can’t create demand for a million barrels of oil a day by pushing a button—not that they would agitate for higher pump prices anyway.

investing · The book

You Named Your Fund What?

Back when I was writing my book, I decided to start a chapter on the wild, wacky, and frequently value-destroying world of “alternative investments” by playing around with the Hedge Fund Name Generator. It usually combines a color, a geographic feature and a corporate moniker. For example, I just came up with “Red Road Partners.”

For the purposes of the book, I kept trying until it spit out some bizarre or offensive sounding ones like YellowRoad Associates, SolidOcean Markets and, best/worst of all, Black Street Brothers.

The fashion used to be names from Greek mythology and I wrote a LinkedIn post a while back, Letter From a Failing Hedge Fund Manager, in which the author’s fund was called Oedipus Capital. But while you use up the acceptable classical names pretty quickly, the current trend has a ways to go. Just do the math: Six primary or secondary colors times 30 geographic features times seven corporate types gives you 1,260 fund names — way more than you’ll glean from the index in Edith Hamilton’s Mythology. Throw in street or town names and you have tens of thousands of choices.

But we have now jumped the fund name shark. An article today by my colleague Cara Lombardo is titled: “Far Point To Buy Global Blue From Silver Lake.”

Doesn’t this confuse people? “Hey man, was I supposed to wire that billion dollars to Golden Lake or Silver Lake?” Isn’t it at least getting a bit old? I know that there is some reflected glory here — BlackRock and what have you — but how about just gaming the system the way the way a plumber does to get to the top of the listings in the Yellow Pages: “2 & 20 Management” or “AAA Amazing Returns Capital?”

Alternatively, just get to the point. “Gigantic Stacks of Money Partners,” for example. It isn’t like there are truth in advertising rules for hedge funds. One of the best funds ever, by the way — though it existed only on paper — was Andrew Lo’s “Capital Decimation Partners.” It gained 2,560% over seven years, though it contained the seeds of its own destruction because it simply sold out-of-the-money puts. In today’s return-hungry world, I bet he could start a real fund, name it that, point out in bold text how it could all end in tears, and still attract huge inflows. What a time to be alive!

Book reviews

A Year in the Books

So many books …

Among my resolutions this past year was to read more determinedly — books specifically. Too much of my consumption had become bite-sized: Newspaper articles, Wikipedia entries and blog posts, and often just fractions thereof. I felt a small sense of accomplishment getting through a long New Yorker feature in a single sitting. The Internet, and Twitter especially, have made my attention span a lot shorter. 

But books are special and anyone who has seen my desk or bedside table can attest to the fact that I have oodles of physical titles lying around and also that the pile seems to keep growing. I’ll start reading one with the best intentions only to dip into something else that seems more interesting, moving the first one onto a stack that stretches back months or years.

Back when I was about 17, I decided that I wasn’t well-read enough and I made a long list of things I “should” read. My dad had sent me a bunch of books in the mail with notes on the inside cover about what age he had been when he had read them — Jack London, Alexandre Dumas, stuff like that. I didn’t pick many of them up. He died when I was 16 and I felt guilty for being so lazy and uncultured. 

I made a list of dozens of books that I figured I “should” read — mostly fiction — and got through much of it by the time I was a freshman in college. A few were enjoyable. Others were a slog. The list broadened my horizons but, in hindsight, the whole exercise was a bit silly. Not much later I read lots of “serious” stuff in college that made a lot more sense with professors putting it into context. 

Flash forward 33 years to my older, far more distracted self. Now I actually like some of the highbrow stuff that I made myself read back then and the only books I occasionally force myself to get through are those relevant to my work or for a book club that I joined several years ago (most of those are pretty good).  

So this year I decided to finish books before I started the next one and to keep track. And while I didn’t have a “to-read” list, I did have an unofficial goal of reading a book a week and also tilting away from nonfiction. I remember hearing a talk by the science fiction writer Harlan Ellison when I was on my “serious book” binge. He said that he read a book a day and I was amazed. I still don’t know how he did it, but not having a formal job probably helped. I only managed 44 this past year, and that was by forcing myself to finish a few. There were six or seven more that I abandoned, a few of which I’d like to revisit.

I’m no book reviewer but, in case a middlebrow journalist’s year of reading is of any use, here are the highlights and lowlights of 2019:

Books I didn’t finish

Washington: A Life by Ron Chernow. Honestly the only reason I didn’t get through this fantastic biography is that it weighs in at close to 1,000 pages and so many other interesting things had popped up on my bedside table. Also, I had to return it to the library. I thought I knew a lot about the man and the period and I was wrong. Like Walter Isaacson, Chernow is a hugely-talented biographer. I’d read Titan, his biography of John D. Rockefeller, several years ago and also loved it. I’ll swing by the library soon and finish the last few chapters.

In Cold Blood by Truman Capote is another I just didn’t finish. This grisly tale is a modern classic written in 1965 about a 1959 slaying of a family in rural Kansas and a book that I had been meaning to read for a while. Sometimes even “modern” classics feel a bit dated — especially those by a writer like Capote who is so widely-copied — but this one holds up very well. I just ran out of gas.

Snow Crash by Neal Stephenson. After the 5th or 6th science fiction geek in my life urged me to read this book, I finally ordered the paperback from Amazon. It’s certainly clever and I really wanted to learn more about its hero, “Hiro Protagonist.” Reading it 20 pages at a time during my commute just wasn’t the right way to get into the novel’s dystopian world, though. I’ll try again when I’m on a beach or somewhere quiet and isolated.

Books I shouldn’t have finished

Having a lofty reading target has a downside– you stick with books that you sometimes shouldn’t. I don’t want to spend too much time on this part of the list because lots of people probably never made it through my book either.

But I console myself with the knowledge that there are so many truly terrible books published. We have boxes and boxes of awful, self-promoting nonfiction titles at my office that were sent to some reporter for free. As Christopher Hitchens said: “Everyone does have a book in them, but in most cases that’s where it should stay.”

It wasn’t like I picked stuff up at random. I thought I had a pretty good filter — whether the author was someone I’d heard of or if the book had sold well. In the case of these three, those litmus tests failed me. One was even made into a movie. None were actually awful — I stopped reading some real stinkers in the first 10 pages — but these were disappointing.

Ben Horowitz is by all accounts a famously successful venture capitalist, yet his bestseller The Hard Thing About Hard Things is a dud. I was hoping that it would impart some generally useful lessons. They all were specific to running a tech company, and really not even then. It could at least have contained more drama or fly-on-the-wall detail.  Horowitz must either have really good instincts about people or really good employees and partners because he comes across as an empty suit in this book.

I had high hopes for WIld: From Lost to Found on the Pacific Crest Trail by Cheryl Strayed. I blame my “y” chromosome for not liking it. I have nothing against female authors, but I’m not a female reader and some books are just targeted at that audience. That’s smart marketing since women buy more books than men. The Guardian’s explanation: “Women know how to read properly, while men have a desultory and, at best, casual approach to books.”

Sure, maybe, whatever. I had read Bill Bryson’s witty A Walk in the Woods about hiking part of the Appalachian Trail a year earlier and loved it. There was a lot about the experience and the trail’s history and also a bit about being grouchy and middle aged. I thought this would be a more serious take on a more serious hike with maybe just a little bit more navel gazing thrown in. There was just way too much about Strayed’s wacky upbringing and dying mother and her feelings and not nearly enough about my reason for picking it up. It shot to number one on the New York Times Bestseller List after Oprah picked it for her book club and was made into a movie starring Reese Witherspoon. So much for bestseller lists.

The force wasn’t with The World According to Star Wars by Cass Sunstein. That’s too bad because he’s quite an accomplished guy. His book with Nobel Prize winning economist Richard Thaler, Nudge, was good and a lot of his other books look really interesting. This one probably sounded promising when he pitched it to his publisher but suffered in the execution. Or maybe I’m just not that interested in the saga of how Star Wars was made. The analogies he drew to real life are pretty strained.

Pleasant Surprises

I love stumbling across new authors. Just because they’re new to me doesn’t mean they’re unknown, of course. Here are a few good ones I “discovered” in 2019:

Full Tilt: Ireland to India With a Bicycle by Dervla Murphy. I found this Irish author by accident, but she’s actually well-known and this is the book that made her a famous travel-writer back in 1965. The title is self-descriptive and her tale is incredible — especially the parts in Afghanistan and Pakistan. Murphy is, according to her Wikipedia page, still alive. It’s amazing that she lived to tell just this tale, frankly.

Tom Barbash is another known writer who was unknown to me. I picked up The Dakota Winters in the leftover bin at my office and really enjoyed it and then passed it on to my mother-in-law who liked it too. It’s a tale that mixes real people and places — John Lennon and various locations in troubled 1980s New York — with the fictional family of a struggling TV talk show host. I was 11 when Lennon was shot and New York was pretty crazy then. This is a nice snapshot.

I don’t often cackle maniacally on the bus to work, but Hits & Misses by Simon Rich had my fellow commuters looking at me sideways. The reviews compared him to Wodehouse and Thurber, which is high praise indeed. I wouldn’t quite say so, but these stories are really, really funny.

Shooting Lessons by Lenny Kleinfeld. Amazon informs me that “customers who viewed this” also looked at Swag by Elmore Leonard, which isn’t surprising. I immediately thought of it while reading this hard boiled story about a cop hunting for a killer preying on drivers of “Makro,” a ride-hailing service like Uber. Great story and pacing.

Old Favorites

When in doubt, go back to what, and whom, you know and like. I read seven books by five of my favorite writers in 2019: Bill Bryson’s The Body; Exploring Diabetes With Owls and Calypso by David Sedaris; Meet Mr. Mulliner by P.G. Wodehouse; Dead Wake and In the Garden of Beasts by Erik Larson; and The Undoing Project by Michael Lewis. I also read two books each by Bernard Cornwell and Daniel Silva and three by Agatha Christie, but I wouldn’t call any of them a favorite writer – just guilty pleasures. I also read Skin in the Game by N.N. Taleb, which is most certainly not a guilty pleasure, yet it’s the fourth book of his that I’ve read. I might call him a favorite if he hired an editor, but I keep getting sucked into his knotty, boastful, thought-provoking books like a moth attracted to the flame.

The Best of 2019

The books I recommend most highly include two I already mentioned, Bill Bryson’s The Body, David Sedaris’s Calypso, one from a former colleague, Bad Blood by John Carreyrou, two “classics” that I should have put on my 17 year old list, both set in the rural South: Tobacco Road by Erskine Caldwell and To Kill a Mockingbird by Harper Lee; and finally a nonfiction book by Japanese novelist Haruki Murakami, What I Talk About When I Talk About Running.

I just started running in 2018 and really loved Murakami’s deeply personal take written when he was about the age I am now. Bad Blood, aside from being a riveting tale of the fraud at startup company Theranos, is a master class in investigative journalism. The Body is classic Bryson — full of interesting tidbits woven together by a prose wizard. I’d love to be able to write just half as well as him. And the two classics are, well, classics — no need to summarize those. Here is Italo Calvino’s definition: “Classics are books which, the more we think we know them through hearsay, the more original, unexpected, and innovative we find them when we actually read them.”

Columns · journalism

This is not a spoof

It sounds like a spoof, but a New Jersey company that says it values “your privacy” is suing to thwart an effort to end a costly and invasive practice: calls from strangers using faked numbers made to appear familiar or even official.

Earlier this year, North Dakota made it a crime to “transmit misleading or inaccurate caller identification information with the intent to defraud or cause harm.” The company, called SpoofCall, argues the law is unconstitutional according to a report by The Bismarck Tribune.

Ironically, SpoofCard was until last year part of a company that also offered a service to “find out who’s calling from blocked numbers.” IAC bought the parent last year but says SpoofCard wasn’t part of the deal.

Chief Executive Officer Amanda Pietrocola says the company only objects to provisions punishing callers for “defrauding people of their time.” “Our goal is to find a happy medium here.” She says SpoofCard doesn’t do business with robocallers but won’t disclose how many calls it enables daily.

Tracking down the company’s attorney was straightforward, but contacting Ms. Pietrocola through her company’s own public website took more effort: It doesn’t list a phone number.