June 27, 2010 Leave a comment
The final aim of investing, is simple, make money. So who really make the most money?
For Warren Buffet the most famous fundamental investor, a quote from his Annual Letter from 2009.
Over the last 44 years (that is, since present management took over) book value has grown from $19 to $70,530, a rate of 20.3% compounded annually.
Then lets move on to one of the most successful hedge funds in recent times. Renaissance Technologies which has a knack of trading counter intuitive relationships . They do not give a damn about whether you can understand financial theory, just whether you can exploit any kind of anomaly.
Renaissance employeed thinkers who had spent the bulk of their career in non-economic analytical fields, like mathematics, physics, and astronomy. Once at Renaissance, those thinkers would build data-processing models without any preconceptions about what should cause what, when. The firm’s advantage is in its willingness to trade what doesn’t necessarily make sense.
For the 11 years ending in December 1999, Renaissance’s Medallion Fund cumulative returns were 2,478.6 percent. Among all offshore funds over that same period, according to the database run by hedge fund observer Antoine Bernheim, the next-best performer was George Soros’ Quantum Fund, with a 1,710.1 percent return. A measurement of the risk (e.g., beta, volatility, or leverage figures) which accompanied its high annual returns is not publicly available. In 2009 the Medallion fund topped the list of the most profitable hedge funds with profits of over $1 billion.
- Year 2008 percentage gain: 86%
- Year 2009 percentage gain: 89%
- Year 2010 Q1 percentage gain: 26%
Now the ultimate question is how should you trade then? Well its your choice and you should make use of your own strengths. Do not be pigeonholed by any one form of trading or investing. As Falkenblog points out, you do not get higher returns from higher risk, we all know how the high notes which were backed by lehman turned out. Take for instance a septic tank cleaner, takes more health risks than lets say a computer engineer. But a computer engineer has more salary, that because he has comparative advantage and a particular skill to be used in the job market. Similarly in investing you need to make use of any comparative advantage. Notably, Abnormal Returns also recently pointed out the merits of being an retail individual investors and these are the edges we should be looking out for when trading or investing.
Individual investors have some distinct advantages over institutions. Most institutions need to be acutely aware of the indices against which they benchmark. Individuals, on the other hand, are beholden only to themselves. The performance of the S&P 500, for example, should be but a data point to an individual. Many institutions need days to enter (and exit) their equity positions so as not to move a stock’s price. An individual can do this (usually) in seconds. Maybe most importantly individuals don’t have clients breathing down their necks. As an individual investor you are your own client.