James Montier’s latest paper on the insanity of the policy benchmarks, the failures of Yale model, the dangers of risk parity, and an alternative approach.
Republished with permission:
Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data, ability to repeat discredited memes, and lack of respect for scientific knowledge. Also, be sure to create straw men and argue against things I have neither said nor even implied. Any irrelevancies you can mention will also be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.
"Dollar depreciation leads to higher inflation and ultimately forces foreign creditors to question their rationale and indeed their sanity for continuing purchases of U.S. Treasuries." -Bill Gross
Initial Jobless Claims for the week ended Feb 18th totaled 351k, 4k less than expected but the prior week was revised up by 3k to 351k. The 4 week average did fall to 359k from 366k, the lowest since Mar '08. Continuing Claims fell by 52k to the lowest since Aug '08. Also, Extended Benefits fell a net 69k. Bottom line, the data still points to a labor market that continues to improve however lumpy the process feels for many. ...
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May 30th, 2010 at 11:31 am
In the English speaking world, we all use keyboards known as QWERTY.
It’s pretty bad when your first sentence is that far out to lunch.
May 30th, 2010 at 11:41 am
The QWERTY layout was designed specifically to slow typists down.
Wow, even a quick trip to wikipedia would have told him that was false.
http://en.wikipedia.org/wiki/QWERTY
If you can’t get the simple stuff right, I seriously doubt the tough stuff is going to be right.
May 30th, 2010 at 12:11 pm
jpm,
what is wrong with you?
from your link: “The QWERTY design is based on a layout designed by Christopher Latham Sholes in 1874 for the Sholes and Glidden typewriter and sold to Remington in the same year, when it first appeared in typewriters. It was designed to minimize typebar clashes,[1] became popular with the success of the Remington No. 2 and No. 3 and No. 389 of 1878,[1] and remains in use on electronic keyboards due to the network effect of a standard layout and the failure of alternatives to prove very significant advantages.[2]”
even Wikipedia gets it ‘Correct’..
maybe, try a ‘refresher’? http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Reading+Comprehension
May 30th, 2010 at 12:11 pm
EPIC FAIL
If you can’t get the simple stuff right, I seriously doubt the tough stuff is going to be right.
QFMFT
May 30th, 2010 at 12:17 pm
@Mark
Why did you ignore the part of wikipedia that said this?
While it is often said that QWERTY was designed to “slow down” typists, this is incorrect
May 30th, 2010 at 12:59 pm
I use Wikipedia all the time, but only to track down an origianl source. Its too easily vandalized, and frequently filled with bad or wrong info.
Wikipedia — at least as an authoritative source — is a pretty epic fail in and of itself . . .
May 30th, 2010 at 1:36 pm
jpm,
because the scribe, responsible for the Wikipedia entry, was engaged in http://www.thefreedictionary.com/gilding+the+lily
and, contra to your original point, the Author, of the Post’s piece, was correct in his reconstruction of the events, surrounding the model, that he chose to use to further his Thesis..
May 30th, 2010 at 2:09 pm
So to review:
You ignore the part of the entry that spells out why James’ statement “The QWERTY layout was designed specifically to slow typists down” is wrong.
You quote a part of wikipedia that explains the keyboard redesign, and then ignore the specific statement that those redesigns were meant to keep up with typists speeds, not slow them down.
You then create a convoluted argument, hoping to save face that your original statement was not completely out to lunch when, in fact, it is completely out to lunch.
May 30th, 2010 at 2:39 pm
Wow. The point of the example was an outmoded, less efficient set of rules became the defacto standard through rapid adoption, little reason to challenge it, plus a lack of reason to upend that standard. It’s not surprising to me that the whole asset allocation, efficient frontier theory has taken hold during one of the longest periods between major financial crises (1930s and the crises in 2007-2009).
Good investing has always gone against the grain because the best investments force you to consider what is not herd mentality. In my book, whatever can be done to help investors manage their fear/greed cycles is ultimately more key than a bunch of “theory” that increasingly has a questionable foundation, as includes assumptions that we have always (and moreso now) know are not true (investors always act rationally). I agree with the theory of broad cycles, and if you ever spend anytime with clients, you know that relative return will not buy them a loaf of bread at the grocery store.
Sometimes it pays to NOT be fully invested and look around and use common sense.
May 30th, 2010 at 2:50 pm
No wonder our financial system is in such bad shape.
You have one of the most perceptive guys around doing a very good job at pointing out the fallacies in the way the vast majority of investments are chosen and all people can argue about is whether the story about the QWERTY keyboards is correct. I suppose next we can argue about The Parables were based true stories or if Jesus was just trying to make a point. I suppose Wikipedia doesn’t go back that far.
May 30th, 2010 at 3:54 pm
QWERTY is a compromise design rooted in the limitations of a now-obsolete tech. The most precise way to frame it is as a calculus with variables of finger speed, common two-letter combinations in English words and mechanical limits of early machines.
Slowing down strike times between common letter pairs by moving them out of the “home” position and forcing fingers to traverse more distance is a major input into QWERTY design. It slows typing vis a vis a layout without j in the home row.
May 30th, 2010 at 4:12 pm
The point about risk not equalling volatility is nice food for thought. I kept thinking “Moneyball” as I read this. Do people really believe that Mr. Market doesn’t struggle with valuation? The idea that volatility is not loss but actually may mean opportunity is worth considering IMO.
May 30th, 2010 at 4:48 pm
Well, the paper begins with an ill analogy and and an error. The question is whether the overall message makes sense or not…
“From 2000 to 2010, commodities futures investing (as proxied by the GSCI) has returned 4.8% annually.” (Page 11). I would like to point out that commodity indexes are quite tricky and are not quite the same as the DJIA or the S&P 500.
Revision after revision, GSCI contains more and more elements that have been rising. Furthermore, with time the underlying methodology of the composition of this particular index makes it biased towards one sector or another sector. For example, in his book titled “Hot Commodities”, Jim Rogers notes that in 2005 some 75% of the GSCI was made up of energy. On the basis of these facts I find it difficult to accept that the GSCI may be used as a fair and single measure of investment returns on commodities.
Personally, I believe that perhaps the only reasonable commodity index that may be worth following/referencing is the RICI. The details of the index and a quick overview of the competitive indexes are available in Jim Rogers book mentioned above.
May 30th, 2010 at 7:08 pm
Soooo, if you know which assets will return more in the future, you should buy those assets?
LDO
As usually is the case when an active fund manager rails against benchmarks, all that differs between the policy view and GMO’s view is the degree of confidence in being able to pick winners.
May 30th, 2010 at 9:53 pm
Another salesman who thinks he knows “…opportunity set offered by Mr. Market…”
May 31st, 2010 at 10:46 am
re: QWERTY myth
I use Wikipedia all the time, but only to track down an origianl source. Its too easily vandalized, and frequently filled with bad or wrong info.
Wikipedia — at least as an authoritative source — is a pretty epic fail in and of itself . . .
Can’t say I’ve ever read the wiki entry on QWERTY cited above. I clearly recall this from the print edition I subscribed to at the time and have seen it cited around the internet, w/o any real refutation ,for over a decade
http://reason.com/archives/1996/06/01/typing-errors
May 31st, 2010 at 10:53 am
BR says: Wikipedia — at least as an authoritative source — is a pretty epic fail in and of itself . . .
Of course. But it serves as an example of everything that James Montier failed on. The wikipedia entry quotes an article about the original 1860 patent to improve the speed of typewriters by avoiding jams. The patent itself is online (http://tinyurl.com/22ozbq5).
So James was 2 clicks and 5 minutes of reading away from the original patent by starting with wikipedia.
And it is the second error in as many paragraphs in his essay. The first was the very first sentence: In the English speaking world, we all use keyboards known as QWERTY. Again, a quick search of google would have told him “all” of us don’t use QWERTY.
So again I have to ask: He failed on simple stuff that we can verify with outside sources and then he blew his opening elucidating factually incorrect information. Why would anyone believe the rest of his analysis is careful and thorough?
May 31st, 2010 at 12:59 pm
WOT:
from Ducky’s link, above, ran into http://www.loa.org/debate02/
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BR, apologies, in advance, for the egregious ‘Product Pimping’/'link-whoring’–though, thought it a great deal..
and, given the Season, hard to have a ‘Memorial Day’ if We’re ignorant of our *History..
May 31st, 2010 at 3:40 pm
I found the argument compelling, and came to the forum in the hope that I might find some substantive critique…..but alas, with the exception of ir192217 there appears to be little more than thinly veiled ad hominem froth from aggrieved hedgies…..
That said, I am not convinced by the argument attached to the performance of hedge funds…..the fact that correlation of returns trended to 1 starting in 2007 seems a reasonable outcome given that asset classes collapsed in harmony in the apocalypse.
I think the apocalypse also bears on the degree to which the Yale model could be said to have “failed”….Clearly cash levels were far too low to accommodate ongoing demands on endowments; absent operating need constraints, I am not so sure that the model had to take such a beating.
May 31st, 2010 at 4:27 pm
This is a delightful paper. I love to read this sort of presentation. Unfortunately most of the comments herein were a pointless waste of time.
May 31st, 2010 at 6:30 pm
The idea of ‘bottom up’ value investing is commonplace, but James Montier seems to be advocating ‘top down’ value investing, comparing asset classes against each other. I wonder whether there can be value traps in top down: for instance if the 5% uptrend of SPX dividend growth from WW2 to 2007 is broken, maybe buying low PEs could be a mistake. I guess that right now all investors face a risk of ruin from any number of directions: inflation; debt liquidation; catastrophic equity dilution, market closure and no doubt many more. Valuation is not a big defence against catastrophe, in the sense that someone who buys at $100 and sells at $0 does not do worse than another who bottom fishes at $1 and also sells at $0!
On commodities, as well as the forward slope of prices it may be worth looking at the profitability of production: if finding new oil reserves costs $45 / bbl, then buying forward oil in the market at $30 has a margin of safety, while buying at $60 is more speculative. On that measure. Gold is risky at $1200 while agricultural commodities seem to offer value. Unleveraged commodities below production cost could be the best defence against the unquantifiable risk of ruin.
June 7th, 2010 at 2:26 pm
[...] Diary highlights two great charts by James Montier that highlight this relationship and the effect it had on the roll yield. Prior to this period [...]