Archive for February, 2011
No matter where you stand on the political spectrum, you must admit that George Soros’ investment track record has made him the equivalent of a .400 hitter in baseball. Yet, in a decade that has been lousy for all investors, even the “Grandaddy of Hedge Fund Managers” has had it tough. 2010 was Soros’ worst year since 2002, with his flagship fund up a mere 2.63%. That’s worse than the 8% gain he booked in the meltdown year of 2008, when many rivals were down by 30% or more.
Ten years ago, both Soros and Buffett boasted enviable “30:30” track records: average annual returns of 30% over a period of 30 years. Today, those long-term returns have shrunk to closer to “20:40” track records: 20% annually over 40 years. A top-performing new money manager of the last decade, Bruce Berkowitz, has produced an annualized return of 11.6%. Granted, that’s over a span in which the S&P 500 has risen a mere 0.7% a year on average. But it’s a far cry from the glory days of the young Paul Tudor Jones, racking up five consecutive 100%-plus years. No wonder a lot of the original hedge fund greats are calling it quits, as Soros’ former protégé Stan Druckenmiller did last summer, frustrated by his inability to generate significant market returns.
So will any investor ever again dominate the financial markets the way Soros and Buffett did between the mid-1960s and the dotcom meltdown of 2000?
The short answer is “no”…
And here’s why…
How a Dead Paleontologist Explains George Soros’ Fading Returns
In his 1996 book, “Full House: The Spread of Excellence from Plato to Darwin,” the late Harvard paleontologist Stephen Jay Gould examined the question of why baseball had not produced a .400 hitter since Ted Williams in 1941. The Wall Street Journal recently mused whether Gould’s analysis could be applied to the fading dominance of Tiger Woods in the golf world. That got me thinking whether Gould’s rationale could explain the similarly fading returns of the world’s top investors.
Gould’s argument is straightforward. The overall quality of performance in baseball has improved over time. That makes achieving “outlier” performances like a .400 batting average less likely. On the one hand, it became harder for batters to get on base as pitchers mastered new pitches like the slider; bigger gloves improved fielding; and managers became increasingly savvy. On the other hand, batters have also become bigger, spending less time brawling in bars and more time pushing barbells — and even popping steroids. (Presumably, Gould’s analysis does not apply to swimmers like Michael Phelps, because they are competing against the clock, and not against increasingly able opponents.)
As everyone ups the quality of his game, the top players are performing closer and closer to what is humanly possible. That means less room for “variation” at the extreme edges of the performance bell curve, i.e., where .400 hitters sit.
The bottom line? As Gould puts it, the “truly superb cannot soar so far above the ordinary.”
What Stephen Jay Gould Would Say about Investing
You don’t need to be a Wall Street rocket scientist to apply Gould’s thinking to investment returns. While Soros couldn’t pass his Chartered Financial Analyst (CFA) exams, today there are tens of thousands of CFAs on Wall Street. Formerly secretive “Turtle Trading” trend-following systems are now available for free on the Internet. Tens of thousands of George Soros wannabes have paged and parsed through the grand master’s classic “The Alchemy of Finance.” Paul Tudor Jones summed it up best in his forward to Soros’ book, quoting George C. Scott from the movie “Patton,” as the U.S. general looked out on the tank formations of his German nemesis: “Rommel, you magnificent bastard! I read your book!”
Soros has inspired a whole new generation of hedge fund managers whose own competitive streak made the likelihood of “30:30” track records ever more difficult. Throw in the small army of “rocket scientists” at shops like Renaissance Technologies, D.E. Shaw and Goldman Sachs sucking out every tidbit of pricing inefficiency in the market… and the prospects of the world’s George Soros wannabes look even bleaker. Soros himself described his early career when he focused on mispriced European securities as being a “one-eyed king among the blind.”
Soros: One of a Kind?
Why “30:30” Track Records Are a Thing of the Past
The advent of 24/7 information about markets alone is clearly insufficient to generate outsized gains. Nor is sophisticated financial analysis. Skeptics argue that Wall Street’s army of CFAs and PhDs gave it a misplaced sense of self-confidence by shoehorning irrational human behavior into a complex-looking but inaccurate matrix of undergraduate physics equations. That, in turn, led to excessive risk-taking, which blew up in the financial world in 2008. Meanwhile, self-proclaimed “dinosaurs” like Soros had a “great crisis.”
There are, of course, thousands of small-time traders who crank out Soros-like 30% per year returns. But that’s like comparing a star high school quarterback to, say, NFL great Joe Montana. There’s a big difference between trading small time versus cranking out 30%+ returns, as Soros and Buffett did, year-in, year-out for 30 years.
Investors — like movies and books and pop bands — live in a world of what Nassim Nicholas Taleb calls “Extremistan.” Financial markets will always throw up a “star du jour.” Just look at the case of Bill Miller. A back-of-the-envelope calculation suggests that any sustained outperformance by a U.S. fund of its benchmark index should end right around 13 or 14 years — which is just about the time that Bill Miller’s fund at Legg Mason fell off the performance wagon. Since then, his fund has lost nearly 40%, whereas the S&P 500 has had a slightly positive return.
And then there is an issue of scale. You can day trade your way to huge returns on a small scale through trading services like my own Global Bull Market Alert. But you can’t do it with $100 million, let alone $10 billion dollars.
Gould did not exclude the statistical possibility that you could see another .400 hitter in baseball. Nor can you exclude the possibility of another George Soros or Warren Buffett. But another investor with a “30:30” track record would be what Gould would call “a consummate rarity.”
As for my view on any single investor’s chance of replicating the “30:30” track records of Soros and Buffett in the financial future?