In finance there is a group of people who tend to think they are just too smart and too well educated for everyone else. A lot of these guys run "quant" funds, investment funds that essentially trade using fancy formulas. There is a certain arrogance in thinking that a computer can understand markets in ways that humans cannot. Unfortunately for our quantitatively minded friends, sometimes humans do things their models don't anticipate.
This week Goldman Sachs is defending their Global Alpha fund. Global Alpha is one of the biggest, and probably the most famous quant fund in the world. While its track record is impressive, in recent years returns have been tepid as the models the fund uses have lost some of their horse power.
This year Global Alpha is down 16% after losing 8% in July. According to the Journal, the humans who run Global Alpha have stepped in and begun selling the riskiest positions in the fund, positions the model still likes. One has to wonder what the future holds for Global Alpha when the humans begin over ruling the computers. Officially Goldman is denying rumors that they are liquidating the fund, but if they admitted liquidating the fund, other traders would immediately take the opposite positions and crush the fund.
The Journal also quotes Keith Campbell, head of his own eponymous quant fund (which is down 10-12%). Cambell falls back on the "perfect storm" excuse. It is amazing how many "perfect storms" there are today, in fact the "perfect storm" seems to be so routine that I think we should just start calling them "storms".
Today it seems that any time two bad things happen at close to the same time we have a "perfect storm". The real situation may just be that Mr. Campbell's trading model isn't very good or very well designed. It would be difficult for anyone to admit that you aren't as smart as you think you are, and not as good at computer programming as you told your clients you were.
It seems like a lot of these models incorporate sunny days 365 days a year, which makes even a small shower look like "the perfect storm".
Thursday, August 09, 2007
Wednesday, August 01, 2007
Greedy When Others are Fearful...
I'm certainly not an expert on finding the bottom, but I think i can see value when it is presented to me. So, on a day with the S&P down a percent and in a week where it just seems like everyone is ready to crack, let me throw out a few names that I think you buy an forget for a while.
PCAR - I love this company. Some of the best brands in heavy trucks. The EPA put new emissions requirements in effect this January, which prompted a huge pre-buy during 2006. there is another cycle coming in 2009 and Paccar will benefit. The stock has fallen back into a range where you can feel good buying it. At 16.5 times trough earnings, a nice dividend yield and a ton of cash on the balance sheet, this is a stock you could own through some price volatility.
USG -- First off, I know, I have liked this stock for along time and for the past couple of months it has gone in one direction, down. The company is tied closely to residential housing and that makes it toxic waste in today's market. However it is also cheap and very well run. USG recently bought a building product distributor in California, is improving the quality and efficiency of its plants, and has cash on the balance sheet to make timely acquisitions.
The stock is tipping towards $40 per share, which means that today you can buy it for less than I did, and less than Warren Buffett did.
BAC - Everyone is worried about "liquidity" and thus has sold off the financials. Bank of America has a undersized mortgage division and continues to grind out growth by attracting new customers every day, every week, every month. At less than 10 times earnings and a dividend yield of 5.4% (44 bps above the 10 year treasury) you can sleep at night knowing that every quarter a check is in the mail.
(Correction: in the time it took to type this the S&P went from down 1% to up 1%, welcome back price volatility)
PCAR - I love this company. Some of the best brands in heavy trucks. The EPA put new emissions requirements in effect this January, which prompted a huge pre-buy during 2006. there is another cycle coming in 2009 and Paccar will benefit. The stock has fallen back into a range where you can feel good buying it. At 16.5 times trough earnings, a nice dividend yield and a ton of cash on the balance sheet, this is a stock you could own through some price volatility.
USG -- First off, I know, I have liked this stock for along time and for the past couple of months it has gone in one direction, down. The company is tied closely to residential housing and that makes it toxic waste in today's market. However it is also cheap and very well run. USG recently bought a building product distributor in California, is improving the quality and efficiency of its plants, and has cash on the balance sheet to make timely acquisitions.
The stock is tipping towards $40 per share, which means that today you can buy it for less than I did, and less than Warren Buffett did.
BAC - Everyone is worried about "liquidity" and thus has sold off the financials. Bank of America has a undersized mortgage division and continues to grind out growth by attracting new customers every day, every week, every month. At less than 10 times earnings and a dividend yield of 5.4% (44 bps above the 10 year treasury) you can sleep at night knowing that every quarter a check is in the mail.
(Correction: in the time it took to type this the S&P went from down 1% to up 1%, welcome back price volatility)
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