There was an article in Barron's about bond insurer MBIA Corp (MBI) this weekend.The article was complicated as it dissected the company. The whole topic makes a good point about stock picking.
The insurance business is a complicated business. Anything to do with bonds is complicated so any company involved with both is going to be very complex and have a lot of moving parts under its hood.
Regardless of your stock picking prowess would you really be shocked if something that MBI insured blew up or if something dominoed to hurt MBI? I am not saying there is something specific around the bend, I don't know just that it would not be a shock.
In assembling a portfolio that includes stocks it makes sense to consider what sort of chance a stock has of turning into something nasty. Obviously any stock can blow up but when a blow up seems very easy to construct in a portion of the portfolio, financials, where you don't usually take something like that on. This trait makes more sense with biotech, tech or small cap miners. Stocks in those groups have the potential to go up a lot, MBI...not so much.
New topic; a reader asked about how to get started managing money. I guess there are two paths; work for someone else or hang your own shingle. I learned quite a bit working for someone else before my current gig.
At some point you will probably need to ask friends or family to give you a shot. My first few clients were Walkerites (or are we Walkeronians? obscure Taxi reference). I knew that writing would be integral to whatever progress I might make. I never expected anyone to ever read my stuff but I thought I would be able to point back to things I had written, in the hope that I'd turn out to be correct every so often which might do some talking for me.
I lucked out latching on where I did, which came about after getting something published in Barron's a few years ago. So this was my path and obviously I think highly of it.
If you know a lot of really rich people, that would certainly be a way to get started on your own. Getting real heavy in networking might work but I would be so bad at it that I have nothing to offer on that approach.
Ultimately luck will have to play a role and whatever you think is the best way to break in you need to work very hard, be ready to not make any money (to speak of) for a while and love what you do.
The picture is obviously from the College World Series game we went to last Sunday. On another sports related note; the Padres lost to the Red Sox on Friday wearing some vintage, old school uniforms. Diehard sports fans can check them out here. What a hoot.
8 comments:
Regarding the insurers: One of the most fascinating things I've done is read the rating agency's reports on several of these insurers. It was part of a jag that I was on in researching subprime, CDO's and the like. So what happened on Friday I was fulling expecting. And the enormous amount of geeky reading that I did helped me understand the issues--understand them for myself--not understand them to have them spoon fed through the media (not you, Roger). I would highly recommend interested folks go to FGIC's website to read the rating agency reports. http://tinyurl.com/2twbr5 The industry report is particularly good. But, you have to be interested in this issue, otherwise your eyes will glaze over and saliva may accumulate at the corners of your mouth.
I still have but a nascent understanding, but I understand it well enough to know that the hedge fund blow up at BSC is not an "isolated" incident. Remember, the HSBC hedge fund blew up too. These are HF's under the umbrella of deep pockets (yes, I realize that visual doesn't work)--so what about the not-so-well-connected HF's?
Leisa brings up a possible good subject for Roger to expound on this week. Are even more hedge funds going to implode in the next few months, and if so, how much will that affect the market? And are all or most hedge funds at risk?
As for someone getting into money management; if I was interested in having someone new manage my money, I would certainly want to see if they beat the S&P 500 with their own investments over a 5-10 year time frame. And if so, then by how much.
If their own portfolio is either under-performing or matching the market, I would certainly look elsewhere.
Models this week:
Timing model = 4.0
100% long
Global Allocation of long positions
MSCI EAFE Index 40%
MCCI Emerging Markets Index 30%
Russell 3000 Index - U.S. 30%
U.S. Sector Ranks
U.S. Oil Equipment, Services & Distribution 4.5
U.S. Mobile Telecommunications 3.0
U.S. Oil & Gas 3.0
Composite Internet 3.0
U.S. Basic Materials 2.5
Small Cap Growth 2.0
Top Intl. Sectors
MSCI Malaysia Index Fund 3
MSCI Germany Index Fund 3
S&P Latin America 40 Index Fund 3
MSCI Singapore Index Fund 3
MSCI Brazil Index Fund 3
MSCI Mexico Index Fund 3
FTSE/Xinhua China 25 Index Fund 3
MSCI South Korea Index Fund 3
MSCI Emerging Markets Index Fund 3
MSCI Australia Index Fund 3
All the sentiment models are basically neutral so my timing model is now being driven by trend indicators. I have no inkling which way this market will go and nothing will surprise me.
Anon...certainly not all HF's are at risk. I'm sure there are HF's that kept a wide berth.
But, what this does bring to the forefront is HF transparency. The overall quantification of risk is currently unknowable as there are not codified rules for such. So no one really knows who is holding what and that adds to the level of potential systemic risk in the system. Not even the investors received straight answers in a timely fashion.
Leisa's point limns the distinction, and it is an important one, between uncertainty and risk. A wide margin of error (or low level of confidence) can make risk assessment difficult, an unknown margin of error makes it impossible. The zone in between is the netherworld that HF's, CDO's, private equity and a bunch of other stuff inhabits.
Okay if you trust it (or trust your ability to retaliate if betrayed but, assuming your name isn't Don Vito Corleone or Tony Soprano, you are probably overestimating that ability).
Regardless (in the parlance of game theory) when times are good a 'stag hunt' -- a competitive yet none-the-less cooperative endeavor to maximize return -- is still possible and profitable; but when times turn tough or highly doubtful, as is the case here, even the most companionable stag hunt can easily transform into the 'prisoner's dilemma' where optimum paths lead inexorably to betrayal ('defection').
There are probably HF's, CDO's, CMO's and CLO's galore that one might still want to own (particularly if they could be acquired at a nice discount) but, in the absence of transparency, pricing them can be a real bear.
In any case if the investment banks can hold the line here it may be possible to still muddle through with a 'normal' correction I think. If there are a few more collapses like the Bear Stern's funds then I think matters will become considerably more serious. JMO
Leisa.
I was wondering about the penchant among some hedge fund managers to seek higher returns (their selling point) through leveraged companies, and the possible present risk for that strategy given the volatile market conditions.
Not to mention what ever else they have up their sleeves to achieve higher returns; which always means more risk.
I have to chuckle when the subject of sub-prime lending, insurers of same and the certain carnage that is absolutely, positively going to happen to any company even remotely associated with the above is outed.
My advice: quit reading the pseudo intellectual pinheads and follow the money to the practitioners and smart money kings (Carl Icahn is one) buying real estate aggressively from the buffoons who loaned money to speculators and credit busts in the hope that their chicken s*** clients would morph into chicken salad.
If the financial system survived the Jimmy Carter years, surviving the present burp is guaranteed.
I am agressively (selectively) buying real estate in three states and selling in one. I am averaging 20-30% return before write-offs immediately. I am not selling stocks to buy real estate. I am using positive cash flow from other properties and free cash to buy on the cheap with great terms.
No need to read the geeks. Thirty-five years of experience tells me to buy low - since March. And suffer pain only in my right hand endorsing all those first of the month rent checks.
Love your common sense and directness - T.
Cheers
Barmix
Brisbane Australia
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