“Garbage In, Garbage Out”
“On two occasions I have been asked, “Pray, Mr. Babbage, if you put into the machine wrong figures, will the right answers come out?” … I am not able rightly to apprehend the kind of confusion of ideas that could provoke such a question.”
– Charles Babbage, Passages from the Life of a Philosopher
“Somebody reminded me the other night that I once said “greed is good.” Now it seems it’s legal. Because everyone is drinking the same Kool-Aid.”
– Gordon Gekko, Wall Street Never Sleeps
“To big to perform.”
– Sophocles Sophocleous
The portfolio closed the month on par with the S&P 500 at 5.49%. The biggest gainers were TRN (27%), VLO (17%), and VOYA (13%) while GTS (-22%) was the largest loser following a disappointing earnings announcement.
I spent several hours this month looking through various Bloomberg data, as it is can be disappointingly inaccurate. Absolutely shocking. At one point I started questioning my sanity. My favourite error was the number of shares of Anthem (ex-Wellpoint). Anthem being one of my largest holdings during the 2014 was familiar to me and when Bloomberg data showed that shares outstanding were 293m and not 270m I knew something was wrong. I went through the filings and then after two hours with the Bloomberg help desk… they escalated the problem.
Their response: “Thank you for your question regarding [ANTM] and the Shares Outstanding value for the most current period. …we have realized that there was an error in our data and the correct number has been reflected on FA. We are very sorry… In this case for [ANTM] the data was not updated from the correct source…
…We will do our best to ensure this error does not happen again. Thank you for your understanding and patience, and thank you for using Bloomberg Help!”
Unfortunately, this was not the only case. During the month I had to reverse a trade I had put on. To be perfectly honest, the correct input didn’t change the conclusion by very much but it changed the balance in the opportunity and of course the risk-return profile. Please note that the market cap info was correct and used the correct data, as did the EV page. The problem was with the FA page and exporting data.
Furthermore, for those of you who have looked at Bloomberg backtesting and what they state as “point-in-time”… well my advice is to think twice about it. I spent two full days on it and my conclusion was that there were way too many problems with which data was made available to be dependable. I tried to explain this to Bloomberg, but I gave up in the end. I’m currently writing an article on some of the data issues I have seen and will publish it soon on Seeking Alpha.
The delay in sending out this letter was due to my trip to London to attend two conferences. Bloomberg hosted a hedge fund startup conference. There were providers of fund related services (i.e. prime brokerage, legal, etc) and an interesting panel on seeding if you can call it that… To me it looks like the seeding business is dead. Yes, dead. There a tons of articles and stories about seeders investing in new funds. However, today’s seeders are no longer looking for startups. They are looking for established funds to help take them to the next level. What does this mean? It means if you have $50m under management and want to push higher to generate the mega-fees then you can approach a seeder. Can’t a manager get by with $50m? Sure he can! Some of you may disagree but depending on the strategy and asset class there are cheap structures where a small team can do extremely well with $50m. Not only can they do well, but also have the flexibility due to size. The larger you are, the smaller the investible universe. And as there are way too many megafunds around, this investible universe is much more efficiently priced. When I worked at an EM hedge fund, our best returns came during the years we were small. A few good investments went a long way. The larger you are the bigger the deals you need to make to make. Hence I’ve coined the term “too big to perform”. Now I can understand it if you are dealing in EM bonds and you need to size in order to get the flows and to generate enough in fees to cover an expensive offshore and onshore structure. But what about all the equity guys?
With the availability of data and cheap research sources, the Peter Lynches of the world can re-emerge. There are plentiful opportunities for both long and short positions. Small managers can easily outperform the market thus providing a service to investors while generate a good income for themselves. At the conference I heard from seeders that generating alpha was the least important and that structure and team were more important. I was shocked to hear that. I can understand an investor’s concern if the manager is taking excessive risk, but assuming this is not the case, it’s sad to hear where the industry is going. If returns are no longer important then why should an investor bother? They should just go passive and save the costs and the effort. The argument is that risk is more important and protecting from the downside. But has that been proven empirically by anyone?
Click here to read entire letter. Subscribe in order to receive the newsletter at the beginning of the month. Here it is posted with minimum one month delay.
