What a Little Rate Cut Will Do

The purpose of this commentary is not to run my head about every little twitch and hiccup in the market, even the two or three hundred point hiccups. Today was a big upside day, 300 plus points on the Dow.
First, at 13,500 on the Dow, a couple of hundred points isn’t what it used to be. When the Dow was 1000, a hundred points was 10%. Now it’s well under 1%.
Second, without volatility, there is no market. (Only hedge funds live in the delusion there are market returns with less risk. Only hedge fund investors live in the delusion that they can give up 20% of the profits to the managers and outperform the market on the same day.)
I looked up hedge fund performance statistics, then compared them to the index averages. What’s amazing is that, the best I can tell, they not only on average failed to beat the S&P 500, but report their returns BEFORE fees.
Essentially, what that means is that they say they got a 12% return, but that’s not what the investor got. If an investor put up $100,000 and the fund earned 12%, that’s $12,000. THEN the fund manager takes his cut, upwards of 20% or $2,400.
The investor gets a profit of $9,600 or 9.6%.
So did the hedge fund earn 12% or 9.6%? Depends on whether you ask the manager or the investor.
The real lesson of big jump days is the old 40 best days story most investors have come across by now. You know, if you missed the 40 best days over the last 20 years, your return went from 10% to 1.5%. (These are pretty close stats for the time frame of 1983 through 2003.) You can Google more examples if you like.
Naturally, if you could market time, and figure out how to miss the worst days, you’d be Super Investor. You’re not. Neither is anyone else, even very sharp guys with PhDs in math. Not even the guy who can calculate who owes who what after the golf match, including handicaps and pressed bets. I don’t much like golf, particularly that guy.
Don’t reply and carefully explain how the XYZ hedge fund outperformed some index in the last 3 days, 3 months or 3 years. I’m certain it’s true. The problem is not reading history, librarians can do that. The problem is predicting the future, which past performance cannot do. Your personal hedge fund pick will always outperform the market, until you actually invest in it.
So what do you put the money in? Here’s a clue. Go to ishares.com. Look over the various index funds. Read about ETFs (exchange traded funds.) Play with the asset correlation tools, portfolio construction tools, even desktop widgets. Have fun, it’s free. You will learn by doing. I’m not schilling for ishares. You can go to Morningstar as well, they have some neat stuff, so does Vanguard.
In future blogs, I’ll make some suggestions as to what to look for and how to enjoy the game, not get an ulcer over it. And you don’t have to listen to the golf guy. Do you notice that the golf score statistician never owes money after the round? Never buys a round of drinks? He’s probably a hedge fund manager.