Category

trading strategies

Wall Street

Why 99% of Hedge Funds Are Living on Borrowed Time

By , Special Situation Strategist, Money Morning - • Print | Email

Hedge funds were supposed to be the ultimate "insider" investment vehicle. Managers would be able to do whatever they wanted – go long, go short, buy bonds, buy commodities, or do whatever they thought was necessary to earn high returns for their investors.

The idea was that hedge fund managers, given the latitude available to them, should be able to do well no matter what the stock market did in a given year.

It was investment nirvana, and tickets to the show were not cheap: Joining hedge fund royalty would cost you "two and twenty," which is to say 2% of assets and 20% of profits.

The first hedge fund was introduced back in 1949 by Alfred Winslow Jones. It performed very well; Jones was long stocks he liked and – as a hedge – short stocks he didn't.

The returns were solid, and it did, in fact, do pretty well no matter what the market did.

His success gained imitators, and the industry grew steadily throughout the 1950s and '60s.

But people will always be greedy, and greed will always make you stupid. That's what happened to hedge funds as the 1970s approached.

Some fund managers wanted to be the best, so they figured if they just bought the best stocks and left out the whole "hedging" idea, they would gain an edge over their competitors.

They did – until they didn't.

The bear market of the 1970s left the un-hedged hedge funds exposed, and the losses were enormous.

The hit was so punishing, in fact, that it left hedge funds out of favor until the 1990s.

Then things changed...

Stock Market Crash Insurance

This Specter from the 70s Could Return to Eat Your Wealth

By , Money Morning - • Print | Email

Bell-bottom pants and disco weren't the only things to hate about the 1970s. In that difficult and turbulent decade, the United States was thoroughly bedeviled with a crippling economic condition known as "stagflation."

It's a weird (that's the only word for it) and intractable combination of stagnating growth combined with inflation.

And unfortunately, unlike Richard Nixon, stagflation's got a high likelihood of coming back.

If that sounds shocking, or maybe even unbelievable, I understand.

You see, before the stagflation of the 1970s, mainstream economists were actually convinced the condition was itself impossible. The academic consensus at the time was that inflation and growth were inseparable.

But as that decade proved, recession and inflation can absolutely happen concurrently. If you lived through the era, you'll agree it's no exaggeration to call it the worst of both worlds.

Of course, when you understand how it unfolded and devastated the U.S. economy in the 1970s, you'll immediately see why it'll likely recur soon.

Don't worry - I'm going to share with you my favorite, inexpensive way to shore up your position when this "blast from the past" returns to wreak havoc all over again...

Trading Strategies

Why I Think One of America's Greatest Investors May Be Digging Through My Mail

By , Special Situation Strategist, Money Morning - • Print | Email

Howard Marks, one of the wealthiest investors in the United States, just released his newest investor letter, and in it, I find a few ideas that are eerily similar to what you and I have been talking about for months: Index investing is a dangerous, expensive Wall Street con. 

If you're not familiar with this battle-scarred (and unreasonably wealthy) veteran of the markets, Marks fought his way through both the equity and bond markets for over 40 years.

He also happens to be an extremely incisive writer, with his book, "The Most Important Thing," considered a must-read for anyone looking to achieve success as an independent investor.

In his latest letter, he takes on index investing, an approach that I frequently call a silly waste of time if you're beyond middle age and don't have four or five decades to build your wealth.

Ironically, it was Marks' University of Chicago professors who birthed the idea of index investing in the late 1960s. They saw it as a way to ensure you never underperform the Dow Jones Industrials or S&P 500, as well as never pay ridiculous management fees. (So much for that idea…)

But what most investors don't understand about indexes – and what I want to show you today – is that indexes didn't become popular because the returns are phenomenally good…

… rather, it's because the active managers have phenomenally good salesmen working for them night and day to sell the pipe dream of low-risk, high-return indexing to regular, unsuspecting investors…

In other words, the active managers are phenomenally bad...