The Only Change on Wall Street

The only changes on the Street are the names of CEOs and the schemes their minions devise to peel off pieces of your money. Let's do a mini recap.
There is no way to ‘outperform’ the market without taking increased risk. And that's not really outperformance. It's like saying a 300 pound weightlifter "outperformed" a 120 pound one because the big one picked up more weight. You have to adjust by the lifter's size, compare pound for pound as they say.
People think of outperformance as, 'did I get a higher return than the S&P or Dow?' That’s not how to look at it. You outperform, really, only when you got a higher rate of return and took no more risk than the index.
Pound for pound.
When you got a higher return and took more risk to do it, you didn't get rewarded for being smart, only for taking more risk.
It works the other way too, as Citigroup, Merrill, UBS and a host of investors discovered. They took outrageously leveraged bets on derivatives and, for a while, everybody looked smart and pretty, like closing time at the bar. Money is an intoxicant too.
Then the risk part of risk and reward happened. The only people who didn’t take any risk were the CEO’s who got paid millions for their abject failure. I’ve had my share of failures. None of them resulted in me getting a pot of money so huge I could heal my ego in platinum Bentleys.
What’s so amazing is, none of this is new. Remember Long Term Capital Management? A couple of years turned out to be all the long term they could handle. There was the failure of other major hedge funds before the subprime meltdown, Tiger Funds, Aman Capital, Marin Capital, Bailey Coates Cromwell Fund, Amaranth, just to name a few. Since they don't have to report to anyone, there's almost no way to know how many lesser funds just evaporated. All of which failed before sub-prime was even in the lexicon. So much for Santayana. He was never right about remembering history anyway.
After the subprime mess, my guess is the net return of all hedge funds for all time surpasses even the miserable track record of the aviation industry, the net return of which is zero.
Of course airlines failed for different reasons. A long time ago, airlines decided that stewardesses should be flight attendants. Stewardesses were attractive, friendly to a fault, and generously passed out food and drink to inebriated businessmen. In those days, stews left the job when they became mothers. Now they’re still grudgingly handing out pretzel crumbs when they become grandmothers. I can imagine the first 100 year old active flight attendant as Time Magazine “Person of the Year.” By then, there won’t even be seats the size of grammar school desks. We’ll be jammed on rows of plastic benches like some Disney ride and a bar will drop down to keep us all in place. We’ll sit fanny to fanny like hordes of fans at a Packers game. Toilets will be built into the bench, no need for that “keep your seat belt fastened just like we do here in the flight deck” announcement. How did I wander off? Where were we?
Oh, yes. Outperformance. Well, there is no such thing when you take risk into account. You can’t get a higher return than an index with the same risk, you can’t get the same return as an index with lower risk. Despite promises made by money managers and hedge fund dweebs the world over. If they say they can, they are either ignorant or malicious. Which one do you want your money with?
After this recent debacle, the dust will settle and some new genius scheme to trade your account for fees and commissions will emerge. It will sound really good, it will have a very exciting “track record.” It will say, on the cover, some version of “Past Performance is No Guarantee of Future Results.” Ignore that message at your peril.