Today's Lesson: Live by the Sword…

I want to call attention to something that I think is a really important lesson for investors and, to a lesser extent, traders.  The first quarter of this year was an absolute risk-on extravaganza for US stocks.  Not only did raw beta (the S&P 500) give you a 12% howyadoing, some of the most horrid and risky stocks were able to deliver more than double that return (Bank of America, anyone? Netflix! etc).

And if you were running a pedal-to-the-metal book of holdings in that atmosphere – and picked a few of the standouts while concentrating in them heavily, you had one hell of a quarter.  No one exemplified this concept better than hedge fund manager Whitney Tilson of T2 Partners.

This was from his March investor letter (as relayed by Business Insider):

Our fund rose 10.6% in March vs. gains of 3.3% for the S&P 500, 2.1% for the Dow and 4.3% for the Nasdaq. Year to date, during the best first quarter for the S&P 500 and Dow since 1998, and the best for the Nasdaq since 1991, our fund also had its best first quarter, jumping 23.6% vs. 12.6% for the S&P 500, 8.8% for the Dow and 18.9% for the Nasdaq.

26% in Q1 is outstanding no matter which way you slice it.  Tilson had a tough 2011 but came into the beginning of the year very strong.  But for investors looking at this quarterly performance, the stated return should NEVER be the focal point – it should always be a question of “how was this return produced.”  Now we know the answer – it was produced by taking aggressively-sized positions in a collection of volatile, out-of-favor “value” names in the context of a junk rally, a from-worst-to-first meltup that saw last year’s losers benefit from a cessation of year-end shelling selling.

I like Whitney, always have.  He is more forthcoming than almost any other hedge fund manager I can think of, admits his losses and is never shy about laying out his investment theses in public forums, essentially availing himself to the critiques of a million armchair portfolio managers around the world.  I give him credit for that and I respect the amount of homework he does on each of his ideas.

But we have to talk about the consequences of not knowing the “how” and only paying attention to a portfolio’s stated return in a given period.  Here’s how Whitney fared in May with his strategy and stockpicking (via ValueWalk):

Our fund fell 13.6% in May vs. -6.0% for the S&P 500, -5.9% for the Dow and -7.1% for the Nasdaq. Year to date, our fund is up 8.5% vs. 5.2% for the S&P 500, 2.6% for the Dow and 8.9% for the Nasdaq.

On the long side, other than our two largest positions, Berkshire Hathaway (-1.6%) and Iridium warrants (-2.8%), everything else got clobbered: Pep Boys (-37.8%), J.C. Penney (-27.3%), Dell (-24.7%), Sears Canada (-23.2%), JPMorgan Chase & Co.(NYSE:JPM) (-22.9%), Netflix (-20.8%), Barnes & Noble (-20.8%), Citigroup (-19.8%), Grupo Prisa (B shares) (-19.3%),Goldman Sachs Group, Inc. (NYSE:GS) (-16.9%), American International Group, Inc.(NYSE:AIG) (-14.3%), Resource America (-12.9%), SanDisk (-11.6%), and Howard Hughes (-10.8%)

Our short book declined substantially more than the market (though not nearly enough to offset the losses on the long side), led by Green Mountain Coffee Roasters, which announced dreadful earnings and fell 51.6%. Other winners included First Solar (-31.7%), Nokia (-26.8%), (-11.0%), Tesla (-11.0%), and St. Joe (-10.4%), partially offset by Interoil (+9.9%).

It was an ugly month – our second-worst ever – but for perspective, our fund gave back slightly more than the 12.3% gain of the previous two months. We’re still having a decent year, with a healthy, market-beating gain. In fact, this is the fourth-best start to a year in our fund’s 14-year history.

Now for a hedge fund manager, this is perfectly acceptable, big risk alongside the prospects of even bigger rewards.  Volatility being just a distraction and risk management being virtually non-existent here (how else can you explain having positions down almost 40%?).

But is this an acceptable strategy for you?  Is this level of volatility worthwhile?

The next time you are told of an eye-popping track record or rate of return, roll your tongue back up into your mouth and ask the following question:

“But how were those returns produced?”

Most strategies aren’t successful in all market climates and very few outliers are repeatable in the investment management world (ask the folks who piled into Paulson’s hedge fund in 2010).

Live by the sword, die by the sword.  Tilson is a swordsman.







This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Wealthcast Media, an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here:

Please see disclosures here.

What's been said:

Discussions found on the web
  1. commented on Sep 16

    … [Trackback]

    […] Find More Info here on that Topic: […]

  2. best wig glue commented on Sep 18

    … [Trackback]

    […] Read More on that Topic: […]

  3. pinewswire commented on Sep 22

    … [Trackback]

    […] Find More here on that Topic: […]

  4. Buy weed online commented on Oct 13

    … [Trackback]

    […] Find More to that Topic: […]

  5. DevOps commented on Nov 19

    … [Trackback]

    […] Find More Info here on that Topic: […]

  6. zügelfirma zürich commented on Nov 29

    … [Trackback]

    […] Info to that Topic: […]

  7. tangerine account sign-in commented on Jan 06

    … [Trackback]

    […] Find More on that Topic: […]

  8. wigs commented on Jan 19

    … [Trackback]

    […] Here you will find 71837 more Info on that Topic: […]