Active Fund Managers and Fund Manager’s Activity Are Not The Same

 Active fund management has taken something of a battering in recent years. The rise of low cost index investing and the structural underperformance of the average manager suggests that battering may have been deserved.

 Does the scale of the bruising also vindicate the Efficient Markets Hypothesis? As Fama (and others) posit, can markets instantaneously, digest all new information and reflect it in prices? Is it only luck that allows managers to beat the market consistently?

Can it be the case that all information is indeed immediately reflected in process but not all information is relevant? Do prices capture both noise and signal?

Mayar’s investment philosophy is built on the belief in the importance of a long-term investment horizon. We also believe that signal information is scarce and the opportunities to act to buy companies at sufficient discounts to their intrinsic value rare. As a result, our portfolio has a high active share but low share of activity.

This helps in several ways. It's no secret that all costs cut into an investor's total returns and broker commissions are no different. More trades, mores costs, lower returns. Fewer trades, lower costs, higher returns.

While trading on noise can be profitable in the short term, we believe investing on signal is the way to generate sustainable long-term outperformance.

As this paper by De Long, Shleifer Summers and Waldmann states

Noise traders falsely believe that they have special information about the future price of the risky asset. They may get their pseudosignals from technical analysts, stockbrokers, or economic consultants and irrationally believe that these signals carry information. Or in formulating their investment strategies, they may exhibit the fallacy of excessive subjective certainty

 In response to noise traders' actions, it is optimal for sophisticated investors to exploit noise traders' irrational misperceptions.

 So how to differentiate noise from signal? We believe that the best way is to understand an industry and understand a company to derive the most relevant information. This is done with out reference to the biggest source of noise – the market. By fully understanding a business and its competitive environment, we can arrive at the valuation at which we are comfortable owning the stock. Then we can be patient, waiting for the noise to move the price to meet our signal - which happens on rare occasions.

 That’s the time when active managers should be active.

Time to Stop Timing?

Market Timing Is Notoriously Difficult - And Is it Really Worth It?

If you look through some the sage nuggets of wisdom through the ages, one theme consistently shines through. The importance of timing. Whether it be industry, comedy or sport you can normally find someone at the peak of those fields emphasising the role of timing in their success.

Whether it be by luck

Buzz Aldrin - Timing has always been a key element in my life. I have been blessed to have been in the right place at the right time.

Or talent, hard work and judgement

Yogi Berra - You don't have to swing hard to hit a home run. If you got the timing, it'll go.

And what about timing markets? As we know, market timing is notoriously difficult – after all, the definition of a stock that has fallen 90% is one that fell 80% and then halved again.

To be successful at market timing, ‘all’ you have to do is spot something that is obvious to you and no-one else, be able to express that view accurately in accordance with your mandate and be proven right in a timeframe which is acceptable to your clients. Cassandra Capital may be just as correct as Hindsight Capital but with much lower assets under management when vindicated.

Advocates of market timing may argue that ‘yes, it is difficult- that’s why those that can get the big bucks’. But is it really worth paying up for market timers? After all, we tend not to know who the market timers are before they demonstrate their skill and it’s a feat that has proven incredibly difficult to repeat.

Are these incremental gains worth the expense? Evidence from Albert Bridge Capital suggests not. A comparison of returns from a strategy of annually investing $1,000 in the S&P 500 at its low for the year every year, with a strategy of buying the S&P at its high each year since 1989. The results show that, after 20 years the less profitable approach left the investor with assets 80% of the perfect approach. This appears to support the notion that not only is not possible to perfectly time the market, the effort from attempting may not adequately reward an investor.

We believe the best way to invest in stock markets is to understand an industry, understand a company and invest when valuations offer a margin of safety from a company’s intrinsic value.

We think it’s time to stop timing.