Monday, July 6, 2009

Losers and Winners: The inevitable consequence of risk taking...

I am still astounded by the incapacity of some in the financial media to see the obvious. As an example, consider this article from the Wall Street Journal today:
http://online.wsj.com/article/SB10001424052970204005504574233831651104814.html
If you cannot read the whole article, you are not missing a whole lot since I can summarize the basic theme as follows. A lot of the funds that were in the bottom 10% of last year's performers are in the top 25% of performers this year. As my 10-year old would say "Duh". Why is this a surprise? A risk taking fund will move back and forth between the best and worst performing funds on a period to period basis, based upon how the market does. A fund that is exposed to a great deal of market risk (high beta funds) will be among the best performers when markets do well and badly when markets do badly.

My problem with this article is that it tries to look for deeper meaning when there is really is none. The only good thing I can say about funds that did well this year is that they did not decide to become conservative at exactly the wrong time, but the ultimate test is whether you make money in the long term. There is little in the history of any of the funds mentioned in this article that fills me with confidence that they know what they are doing and that the returns that they are making in good years will cover what they will lose in the bad years.

5 comments:

JPlacer said...

It's amazing how the quality of this paper has been ruined. I just canceled my subscription today (before I read this comment, I must say). It has become very difficult to have one reliable source of information. Any suggestions? I tend to check Bloomberg and the NYT, but only pay, now, for the FT.
Best regards,
Javier

UIUCFINANCE said...

FT is good.

I'd tack on Reuters and The Economist as other publications I would consider reliable and more importantly news oriented rather than entertainment purposes, seemingly what the Wall Street has become.

I believe in that same issue there was a front page article about a fashion trend of men wearing tight jeans....news at its best.

Saurav Roychoudhury said...

FT, followed by Economist.

amar said...

Guess WSJ is running short of good article to speak of...

But we must give credit to the delibration applied in writin so much out of nothin...thts wat writers r paid for..

Amar

Mark said...

I can't agree. First, the article does not say it is a surprise, as you indicate. I am very surprised to see you still using the concept of beta, it has been discredited and even the first proponents of this method of analysis have abandoned it.