Against the herd: trader Mark Spitznagel on contrarian investing

https://www.ft.com/content/941fa030-8135-4964-9d7a-e5274c130592

by paulpauper • 5 years ago

53 68 5 years ago

22c4• 5 years ago

Anecdotally, I have investments in both traditional managed funds and contrarian managed funds. It seems to take longer for the contrarian funds to "strike gold" and overall they have not done better than my traditionally managed funds, but have still done significantly better than leaving money in a "high-interest" savings account.

Also, on average, my "punter" picks do about the same as the contrarian funds although with more wild swings up and down, so for less hair pulling I am tending to move more and more towards managed funds or industry-based ETFs with the occasional punter picks.

I certainly think that having some investments in the contrarian space makes sense as a diversification strategy, but I tend to leave those stock picks up to someone who has made it their day job.

LewisVerstappen• 5 years ago

Anecdotally, I have investments in both traditional managed funds and contrarian managed funds. It seems to take longer for the contrarian funds to "strike gold" and overall they have not done better than my traditionally managed funds, but have still done significantly better than leaving money in a "high-interest" savings account.

How have they done against the S&P?

22c4• 5 years ago

I don't invest in US markets, but of the equivalent index here, the contrarian fund this past financial year has certainly outperformed the index.

Though it almost seems like luck. If you had asked me 2 years ago, my contrarian funds were in the red.

I think the pandemic has really created both good contrarian opportunities as well as good value investment opportunities; both strategies seem to be working well at the moment.

smabie2• 5 years ago

Depending on the fund, returns of the S&P could be irrelevant and not a suitable benchmark. Evaluating a fund isn't as easy as "does it beat the S&P?". There's a lot of other factors to consider.

sb057• 5 years ago

Not sure about OP, but Spitznagel's fund returned 4,144% in Q1 2020. It averaged 105.2% annually from 2009 to 2019.

https://news.yahoo.com/mark-spitznagel-univesa-cio-on-risk-m...

https://www.institutionalinvestor.com/article/b1nhg4w9k5hjp0...

olalonde• 5 years ago

It's a bit controversial but there's a lot of evidence that actively managed funds underperform passive ones. "A Random Walk Down Wall Street"[0] is a good read on the topic.

[0] https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street

riffraff• 5 years ago

An interesting read is also the well known SPIVA report. It's not flawless, but it's quite obvious many hedge funds are not working for you as much as they work for themselves. Which is also what the guy in the article says, incidentally.

https://www.spglobal.com/spdji/en/research-insights/spiva/

22c4• 5 years ago

Yes, I've read similar stories and of course Buffet is famous for saying things along similar lines.

For me, I decided to follow Steve Clark's advice of "Do More of What Works and Less of What Doesn't". I invested in a bunch of different things including ETFs, managed funds, futures, individual stock picks, IPOs, etc. and I found managed funds that seemed to work better than ETFs (though 5 years is not really enough time to know for sure), so I pumped more into the managed funds that were working.

Investing only in IPOs seems to work well as well but the hardest part for me was knowing when to sell (which in my case I almost never sell and I often miss the best opportunity to cash out my IPO investments).

I am sure there are some bad managed funds, probably more bad ones than good ones. I'm certainly not saying managed funds are a better choice overall than just going "all-in" on Vanguard, but picking out a few managed funds to try out after doing a couple of hours research is also not a strategy that should be completely written off either, at least in my experience.

smabie2• 5 years ago

The real takeaway from this is not that it's impossible to beat the market consistently (it's not) or that the price movement of securities are random and normally distributed (they're not), but that as an average retail investor (or sometimes as a sophisticated institutional allocator), it is very difficult to find funds that can outperform (which isn't a linear/one dimensional thing btw, more sophisticated analysis is required) that also you can invest in.

When allocating capital to funds you are being adversely selected against: those who can generate returns probably aren't interested in your money (there's a lot more money in the world than profitable trading/investment opportunities).

As such, I normally recommend to people that unless they are professionals and know that they are doing or HNW (say >50mil), they stick to ETFs for the bulk of their portfolio. To be clear this isn't the optimal strategy, but it's easy and it mostly works.

m1013• 5 years ago

All funds, on average, get the market return. The certain difference with actively managed ones is that they charge a fee, and may pay more in liquidity costs. It's not surprising therefore most underperform.

In investing, the first thing you have an influence on is avoiding fees (go passive).

The second thing you have an influence on is time (remain invested).

vmurthy• 5 years ago

The book mentioned in the article "Safe Haven" is a good listen. I have the audible version [0] and it covers a lot of counter-intuitive things. "Insurance" as a portfolio return enhancer is a core lesson I learnt. Although Spitznagel doesn't tell what this insurance is, deep out-of-the-money put options come to mind. Keep in mind that you need the accompanying PDF to appreciate descriptions of graphs etc!

[0] https://www.audible.in/pd/Safe-Haven-Audiobook/B09BDBLWP4

galaxyLogic2• 5 years ago

"There are “frighteningly many ways that the investment industry regularly smokes people with complicated and unfalsifiable (and thus pseudoscientific) theories and cherry-picked market data”

I've been following yahoo.finance and it's full of articles about "technical analysis" meaning patterns people claim to see in stock movements and what they mean and predict about the future. Isn't that just like astrology? I wonder how it's possible that they are allowed to publish such junk?

m1013• 5 years ago

Mostly junk IMO, except insofar as there are market participants who trade on the back of it and move prices.

thefounder• 5 years ago

Technical trading made millionairs and billionairs during the pandemic era. You can't do that with astrology unless you find a sucker to sell your astrology services.

It surely is "junk" as far as the value to the society is concerned but in finance/trading it's all about money and technical trading makes money.

It's not really like astrology because it has some logic. For example: if a stock was sold for $ 10 yesterday and now it jumped to $100, based today's trading volume and on historical data we can infer that a percentage of them will sell to make a profit. Of course it's not a sure thing so we will balance our trades(bets). We don't even have to win "this" bet/prophecy. We just need to win most of the bets or the highest bets.

Add to this the fact that if enough participants follow the same patterns they can move the market and make their bets a self fulfilling prophecy.

ladberg• 5 years ago

Lotteries also made millionaires and billionaires during the pandemic era, I don’t think I’ve seen any TA that legitimately provides returns at a better than random rate.

noja• 5 years ago

Technical trading made millionairs and billionairs during the pandemic era.

Because the market went up. Can you prove it was because of TA?

samhw5• 5 years ago

You can't do that with astrology unless you find a sucker to sell your astrology services.

That's precisely what TA itself relies on. As the comment above mentions, the avowed rationale of TA is simply "other people use it too, so to that extent the patterns hold".

mettamage2• 5 years ago

Well, yes, but more nuanced. TA is essentially a form of misguided quantitative analysis. The reason it's misguided is because the courses that teach you TA aren't properly backtested.

Renaissance Technologies seems to have a lot of black box mathematical models that they make a lot of money on. How is that different than TA? It's backtested, and analyzed in further rigorous means.

TA misses rigor, that's it. The problem: rigor is hard and many people are too immature to be rigorous, myself included as in many cases it means you need mathematical maturity.

It's weird, I view trading as one of the few fields where academics are more practical than being practical. I don't think the world has learned this lesson yet. I might be wrong of course, just an opinion.

vasco2• 5 years ago

Say a companies directors are not trustworthy and you get a bad feeling from the way they speak about people around them. Later on, huge fraud is uncovered at the company. What does (rigorous or not) TA or backtesting tell you about the likelyhood of something like this happening?

csee5• 5 years ago

Some edges can be quantified easily, and others really can't be.

One canonical example of the former is the bid-offer imbalance. That's because autocorrelation is low, variability is high, the signal can be encoded easily, the distribution is bell-shaped, the heteroskedasticity is low, and we have a tremendous amount of historical data to work with.

TA exists on the very opposite side of this gulf, where its profound difficulty to study using the traditional statistics/ML toolbox is conflated with no edge by many dogmatists in the industry. It's unbelievably difficult to come up with a good encoding of what's visually obvious to a human, and beyond that such encodings are very difficult to backtest because of the typical nasties (autocorrelated data and so forth).

In my strong opinion, the failure of TA is more a failure of the quant industry at present. I believe they will figure out how to monetize that edge, but it's beyond the scope of their tools and capabilities at present.

cblconfederate• 5 years ago

If you listen to Bloomberg radio it s a 24/7 namedropping "technical terms" that are supposed to dazzle its geriatric audience.

lordnacho3• 5 years ago

Quant hedge fund guy here.

Astrologers look at the positions of the stars and planets. Astronomers look at the positions of the stars and planets.

Over the past centuries, astronomers have discovered such amazing things like the distances to other galaxies, the paths of quite small rocks in our solar system, the age of the universe, redshift, cosmic background radiation, and so on.

TA, basically looking at the numbers that come out of the market, is the same. You can do silly unscientific things with it, or you can apply a falsifiable method and make real progress.

If you go down the scientific route, you will find the same data takes you down a rabbit hole of low latency coding, linear algebra, infrastructure, financial theory (time value of money, optionality), economics, and so forth.

csee5• 5 years ago

Have you seen traditional TA methods applied profitably within a quant framework?

WA• 5 years ago

Isn't that just like astrology? I wonder how it's possible that they are allowed to publish such junk?

The TA crowd will tell you that TA is a self-fulfilling prophecy: People believe in patterns and whatnot, take profits at certain levels, buy at others, and that makes TA "true". However, if you think it through, it doesn't make any sense, because it is basically a price inefficiency. If levels and patterns were reliable indicators for predicting the future, there surely would also be a system that exploits these patterns, and thus, TA would be inefficient.

Imagine a hedge fund with enough money to "create" patterns in a market. You could have perfect setups to exploit everyone else in the market. Reminder: Generating alpha / active trading is a zero-sum game.

I enjoyed reading the free articles in this blog. They give you quite a bit of understanding of TA, active trading and all the fallacies around it: https://www.priceactionlab.com/Blog/article-selection/

aerosmile8• 5 years ago

Seems like people are sharing their investment theories, so I'll add mine. Invest in 100x-ers, like Zuck or Musk.

To be clear, a 10x-er is not good enough for this strategy to work. Those are the people who lead at SpaceX and make the impossible possible. What I am talking about is the person who is the 10x-er to the 10x-ers. The person who comes up with the idea and gets those 10x-ers into the same room and organizes them.

Obviously, the scale of that talent is hard to estimate, and "100x-er" is just a figurative term. Think of it this way - there should be only 10-20 such people among the CEOs of public companies (the other 100x-ers are musicians, politicians, authors, athletes, etc). They are easy to spot - definitionally, they do extremely well and will be in the fortune 500, shooting rapidly towards the fortune 50.

The cornerstone of this theory is that given enough talent, an individual can outperform the efforts of thousands or tens of thousands of regular people (hence think of the 100x-er as a figurative term). Just look at Musk going up against the entire automobile industry (while also building SpaceX on the side). Such people tend to find the right problems to work on, get the needed funding, hire the right people, and avoid all the possible calamities. Occasionally they also crack under pressure and smoke a joint on Joe Rogan's podcast, but they always prevail in the end.

Another way of looking at this is to look back in history. Rockefeller, Carnegie, Edison, Ford, Merrill, Walton, Schwab, etc. Would you want to bet against any one of them? So the key is to find that same group of people in today's society. I already mentioned the two obvious ones, but there should be another 10-20, at various stages of their careers. One that recently retired would be Bezos, some of the younger ones could be Max Levchin, Jack Dorsey, etc.

The important point here is to be extremely picky. Max and Jack are probably still too young and need a few more cycles before you can expect them to move mountains. Don't get me wrong, they are exceptionally amazing today. But if you're going to put a considerable amount of money on them (which you would have to if you buy into the idea that there are only 20 investable people of this caliber), you want them to be Steve Jobs-level at his prime in the 2000s, not Steve Jobs-level in the 1980s.

This is super contrarian and the difference between wins and losses will hinge on picking the top 20 versus the top 100 people. YMMV!

m1013• 5 years ago

Good post. Not a fan of Jack though. Maybe I have him all wrong though.

aerosmile8• 5 years ago

Yeah, I've been going back and forth. Kind of leaning in at the moment.

dash2• 5 years ago

The end result of this strategy seems like “invest in Steve Jobs, Elon Musk, Mark Z and Bill Gates”. Doesn’t sound very contrarian.

shapefrog3• 5 years ago

And do so with the clarity of hindisght.

aerosmile8• 5 years ago

The mainstream strategy is to invest in highly diversified ETFs. Investing in just 4 companies would be considered exceptionally risky and contrarian by most people (I would personally also advocate going up to 20).

Also, not to nitpick, but Jobs and Gates are no longer running their companies, and Zuck is down to part-time. I don't consider either of those companies at the same level of growth potential as Apple back when Steve was running it.

didibus3• 5 years ago

There's an alternative correlation I think to your same strategy: "invest in tech".

aerosmile8• 5 years ago

It does seem that most of the prominent entrepreneurs of our age are focused on tech. Before that it was finance, and going back further, steel, oil and railroad. In the future, I expect to see more bioengineering.

samhw5• 5 years ago

This seems to amount to "pick fantastically successful businesspeople to invest in, before the market has priced in their fantasticness". Obviously that would be successful if you can do it, but it's predicated on your being smarter than anyone else in the market, which is ... unlikely.

aerosmile8• 5 years ago

You're not wrong with the description, although I would counter that you don't have to be smarter than anyone else - even if just a fraction of people is undervaluing an asset, you can still make a profit.

I think Elon is a good example of that - a lot of coverage in the past years focused on missed production numbers and that sent his reputation into a tailspin. But anyone who actually bought and drove a Tesla knew that the cars were ahead of their time and that the rest of the country would eventually catch on.

nikprasad• 5 years ago

When you're a contrarian but you get covered in FT (and worse still on hackernews), you stop being the contrarian. You become mainstream. Jokes aside, before you read his book Safe Haven, read the Dao of Capital.

reactspa• 5 years ago

I haven't read either yet. Question: is his thesis materially different from that of Taleb's?

Against the herd: trader Mark Spitznagel on contrarian investing

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