Entries from October 2020 ↓

Beane counting

DOUG  By Guest Blogger Doug Rowat

It looks like Billy Beane may be finished with the Oakland A’s.

Reports earlier this month suggest that Beane, famously credited with the low-cost, value-based Moneyball approach to Major League Baseball team-building, may be forced to resign from the A’s due to conflicting business interests with his investment firm, RedBall. If he does indeed resign, he’ll leave an impressive legacy.

Since Beane joined the A’s full-time as general manager in 1998, the A’s have won seven division titles, played in 13 postseason playoff series including wildcard games and produced the sixth most wins in baseball and did it all, as per the Moneyball method, at very low cost. The one criticism of Beane has always been the A’s lack of playoff success and World Series titles, but as Beane has bluntly put it: “My sh-t doesn’t work in the playoffs. My job is to get us to the playoffs. What happens after that is f-cking luck.”

According to FiveThirtyEight, Beane’s teams actually should have had, statistically speaking, a bit more success in the playoffs than they did; however, his point is well taken. A large sample size is what truly reveals a strategy’s success. What happens in the short term is basically a coin toss. As Beane has also said, a full 162-game baseball season tends to eliminate randomness.

Naturally, the same holds true with investing. Short-term market timers are almost as likely to lose as to win on any given trading day while long-term investors have a much higher likelihood of profiting. Simply put, the long-term investor also largely eliminates randomness:

S&P 500: the shorter your holding period the more you rely on luck

Source: Bloomberg, Turner Investments. S&P 500 pricing data from January 1928 to present

Keep in mind also that the above table doesn’t include dividends, so when these are factored in, the likelihood of a long-term investor earning a profit rises even more. An S&P 500 investor with a 10-year time horizon, for example, should actually expect to profit more than 90% of the time.

Appropriately enough, given this week’s topic of Billy Beane and his low-cost Moneyball approach, the latest SPIVA Scorecard was also released this month and, once again, it proved overwhelmingly that paying more doesn’t necessarily mean better results.

SPIVA stands for S&P Indices Versus Active and its Scorecard measures the performance of actively managed funds against their relevant benchmark indices. What makes SPIVA great is that it corrects for survivorship bias, so if a fund closes due to poor performance, which happens constantly in our business, SPIVA makes sure that this performance is accounted for and not just quietly swept under the rug thus skewing the fund industry’s overall performance data. Here’s what the latest (released mid-October) SPIVA report had to say about Canadian mutual funds:

Although this volatile period offered ample opportunity for stock-pickers to shine, 88% of Canadian equity funds underperformed their benchmarks over the past year, in line with the 90% that did so over the past decade….

Canadian Equity funds were particularly notable for their level of underperformance. On an asset-weighted basis, Canadian Equity funds returned a dismal 7.9% below the S&P/TSX Composite over the past year, the worst relative performance of any fund category.

The story, of course, is much the same with US equity mutual funds, with the main cause of any mutual fund’s underperformance being its high cost. Whether you’re building a baseball team or building a portfolio, the one lesson we can learn from Billy Beane is to never overpay. And with mutual funds, generally speaking, that’s all investors are ever doing.

Stick with low-cost ETFs.

Smart investing’s no different than smart baseball: never pay more for a worse result.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.

Into the swamp

A few scant days before the US election and volatility’s spiked again. See the chart below – the VIX – which measures how many Tums, per trader, are popped on the world’s major stock exchanges, divided by quarts of gin consumed. It’s wicked accurate.

The VIX has spiked the most since mid-summer and will likely stretch higher in the next 72 hours. You know why. The virus is somewhat out of control in Europe and the States. Ninety thousand new cases in America yesterday. Wow. We may still hit a hundred grand by Tuesday, lousy news for a certain president who must remain nameless on this blog (lest we trigger the deplorables).

That vote looks astonishing. More ballots have been cast in Texas before election day, for example, than all the votes (in total) counted in 2016. The fact that 75 or 80 million people will have decided prior to November the 3rd is outrageously historic. But what does it mean? Good to the incumbent? Or the challenger? In any case, it’s got Mr. Market’s attention.

Will the second wave of the virus be as consequential for investors as the first? Recall that stocks plunged more than 30% in just a few weeks back in March before staging a massive comeback. Anyone who had the courage to go equity shopping on March 23rd soon looked like a genius. Could we be headed for that kind of correction again? If so, would it be as temporary?

October – always notoriously volatile – has delivered the worst showing since March. Investors worry about new infections, the fact squabbling US politicians have failed to deliver that new stimulus package, economic slowdown and the election. Actually the aftermath of the election – that’s the firecracker.

The virus hurts the presidency. Uncertainty reigns. Markets hate not knowing what’s next. Will there be a contested, disputed outcome next week? Trump (oops, sorry) has cancelled his election night party in his Washington hotel. Does that mean anything? He has trashed absentee and mail-in balloting. The betting now is that he may win a mirage victory Tuesday night – based on in-person votes – with that thrown into question as the advance polls and mailed votes are tallied and added. But, who knows? It’s all conjecture. And that’s the problem.

First, the nightmare scenario. Then what to do about it.

Says US economist Daniel Ahn: “If there is a constitutional crisis, we believe that the loss of political credibility and standing of the United States as a stable country could threaten its status as a safe haven with unfathomable consequences for the economy and for markets.” That crisis would come as the sitting president refuses to accept the results of the popular vote by alleging fraud, proven or not. A legal battle ensues. Perhaps it even goes to the Supreme Court. Or the floor of Congress.

Meanwhile there is no stimulus package and the year ends with a declining American economy as millions of consumers shut their depleted wallets. Should this happen, Bank of America strategists forecast that US stocks could slide 20%. Bond yields would tumble even lower. Bond prices would spike. The US dollar would be impacted. The Fed would probably go negative.

So what would benefit in this scenario?

Bond prices move in the opposite direction to rates, so investors with balanced portfolios would feel some love. Also with stocks in a post-election funk, lots of money would be looking for a safer place to land. More impetus for bonds to pop. And as the US dollar takes a hit, commodities priced in it would benefit. So cue the gold bugs.

Now, the most important points to remember are these: (a) the US election will get fixed. There will be a swearing-in on Wednesday January 20th. When the outcome is known, markets will restore. And, (b) the virus will fade. The pandemic will pass. The curve will go flat. A vaccine will come and therapies develop. The world will be a much brighter place six months hence. Plus (c) there will be a multi-trillion-dollar stimulus bill passed once the voting crisis (if it materializes) is over. Bank it.

This means if you have cash sitting around, deploy it. Monday, if you’re confident on a firm outcome on Tuesday. The week after, if you’re not. But if you’re invested now in a balanced and diversified portfolio, do nothing. The storm will come, blow down a bunch of trees and power poles, then pass. There’s no point trying to time both the sale and purchase of the same assets. Odds are you’ll get one of those wrong. So, relax. Watch the show.

Tums and gin, by the way, pretty damn awesome.