Every outperformance strategy gets “discovered” right before it’s time to chisel out the letters on its tombstone.
Dogs of the Dow
Moving Average Crossovers
“Buy What You Know”
Sell in May, Buy in November
The Permanent Portfolio
The Low Volatility Anomaly
Growth at a Reasonable Price
Buy and Hold
Sure they can work, but not in the way they used to and never in all market environments. At least not anymore.
Especially now in the ETF era – where a persistently successful approach to investing can become a multi-billion dollar product in the space of 90 days, the marketing banners unfurled atop the New York Stock Exchange, the Barron’s interview with the ink still drying.
Gerald Loeb lived in interesting times, launching his career at the start of the start of the Roaring Twenties. He was the founding partner of E.F. Hutton and the author of The Battle for Investment Survival, a book that inexplicably sold 200,000 copies in 1935 – this guy was talking about making money in stocks during the utter blackness of the Great Depression! Forbes Magazine referred to Loeb as “the most quoted man on Wall Street” and with good reason.
The Crash of 1929 taught Loeb a simple but life-altering lesson, something that would stay with him for the next four decades – nothing always works and nothing works forever. And if the crash hadn’t completely convinced him of this, his experiences through the booms of the 20’s 50’s and 60’s along with their corresponding epic busts served to reaffirm that lesson time and time again.
And if there was one thing Gerald Loeb had come to despise more than anything else, it was investing “systems”. Loeb innately understood that something could not continue to work once enough players were employing it. And players will always, en masse, begin employing the thing that has just worked. Secrets cannot be kept for long enough and the rearview mirror always seems like a front windshield to the crowd.
Here’s what Loeb really thought about your method:
“If there’s anything I detest, it’s a mechanistic formula for anything. People should use their heads and go by logic and reason, not hard and fast rules.”
The Man Group is the world’s second-largest hedge fund and it has a flagship strategy called AHL with $16 billion in it. AHL is a system – a computerized trading formula that is mechanistic in its approach. It had been loading up on bonds as yields dropped, as per the rigorously tested and executed rules it’s been built on. And in the last two weeks, bond prices suddenly dropped and the fund has lost 10% if its capital. The “rules” work until they don’t – they lead to steady profits until they lead to sudden, giant losses. A machine will keep plowing into US bonds until yields are at zero, but would a thinking, sentient, experienced person?
Tadas just wrote about this “death of the low volatility anomaly” thing. Too many people piled in after coming across the persistent success of the strategy. Hot money arrived, the type of money that comes and looks at its watch, jumping back out at the first sign of boredom. Multiples got stretched as the newcomers crowded in. These formerly low-beta stocks got pummeled as the hot money ran back out the door again, grinding their cigarette butts on the foyer wall.
The low-beta style may someday work again, just as the mud-spattered field in which a concert festival has been held may someday recover and begin to grow grass again. But not today, not tomorrow.
Gerald Loeb would have looked at the low-beta, low-vol anomaly this spring and scowled at the valuations and the behavior of the stocks involved. He would have slapped at whatever white paper you were waving to prove your method and told you “Your formula’s broken, kid. Use your head and look around.”
One by one these systems and formulas and Little Books and algorithms fall by the wayside, the validity of their rules and conclusions toppled like toy soldiers.
Bring me the next one, tell me how many funds are launching to exploit it and I’ll show you the next casualty of the can’t-miss crowd.