Historical Results and Commentary
September 1, 2008
Holdings
|
LONG
POSITIONS |
|
|
1 |
AEP |
|
2 |
BMY |
|
3 |
CLF |
|
4 |
EGLE |
|
5 |
FRX |
|
6 |
GRMN |
|
7 |
HDB |
|
8 |
MRO |
|
9 |
MS |
|
10 |
MSFT |
|
11 |
NDAQ |
|
12 |
PAYX |
|
13 |
RAH |
|
14 |
SAY |
|
15 |
TECH |
|
16 |
TKC |
|
17 |
TWGP |
|
18 |
VOD |
|
19 |
WM |
|
20 |
WMT |
|
SHORT
POSITIONS |
|
|
1 |
JCG |
|
2 |
MAR |
|
3 |
SHLD |
|
4 |
VMC |
Performance of Individual Stocks For last 3 months
N/A
Total Increase (Decrease) since
last quarter: N/A
Additions: N/A
Subtractions: N/A
Commentary:
Goodbye from Wall Street.
Well, my time on the sell-side has come to an end, or at least a temporary halt. For the past two years I worked on the software equity research team at KeyBanc Capital Markets in the company’s San Francisco office. In June, Key eliminated its technology research and investment banking division, and that was that. Although losing my job was somewhat difficult, I derived some comfort in knowing my story was not unique among the finance community. In addition, I earned the Chartered Financial Analyst (CFA) designation during my time at Key, passing all three exams in a year and a half, so at least I had that consolation to comfort me.
I have mixed feelings about the value of the sell-side as a way of conveying information to buy-side investors. Spending two years on the sell-side taught me several things, but here are three of my most important take-aways: (1) sell-side analysts are not purely objective but act more like journalists who need to balance a desire to publish the truth while also maintaining good relationships with their sources (who often happen to be senior management at covered companies). As a result, to properly use sell-side research, investors need to understand the author’s biases and understand the limitations of what sell-side analysts are willing or able to put in writing. (2) The time-horizon of sell-side analysts is rarely greater than 12 months. In terms of compensation or respect on the Street, a good call that takes too long to ripen is often no better than a wrong call. Sell-side analysts have the unenviable job of needing to be directionally right in making stock picks despite the fact that much of a stock’s movement is attributable to random noise. The position of a sell-side analyst, talented as he or she might be, is analogous to that of a skilled baseball commentator. The commentator could probably tell you who is likely to win a certain game over the course of 9 innings. But, the commentator probably would be only slightly better than 50/50 if he had to predict which team would score more runs in a given inning, and not statistically different from a pure amateur if he had to predict if a given pitch would result in a strike, ball, out, or hit. (3) My quality of life deteriorated significantly while working on the sell-side. I would check my blackberry at 4:30 every morning, try to make it to the office by 6am, and often stay until 6 or 7 in the evening, and would definitely stay past that on nights when we had an earnings report. Although I generally enjoyed my work, I think it is hard to lead a balanced life working those hours, and going forward I think I will pay more attention to my quality of life.
However, despite the hours and stress, overall, it was a great experience although it was also a humbling one. I had the good fortune to work for a senior analyst that was interested in my career development and who was generous with his time and assistance. He was also vastly more knowledgeable than I was about the world of finance and the world of software, and working with him and speaking with buy-side clients taught me how little I actually know of the wide world of investing.
Looking back at my previous commentaries on this website I shudder at how self-confident and self-assured I used to be given how little I actually knew. There is a saying ‘I’d rather be lucky than good,’ and I think that phrase sums up my previous results with the Bandy 20 Index. I think I was a lucky fool who had some genuine insights into the world of investing but who’s performance was dominated by randomness that ended up producing positive results. In other words, I was the sort of sucker that card sharks love to have sit down at their table, because they know sooner or later, after enough iterations, luck runs out.
So, without wishing to ward off any gifts from lady luck, I hope that my future experience in the world of investing is governed by the opposite of the aforementioned phrase; in other words, I would rather be good than lucky, but if I happen to be lucky as well, so be it.
There are going to be two changes to the Bandy 20 Index. First, I am going to shift the index to a standard quarterly cycle, with updates made on the 1st of December, March, June, and September. Having been through the CFA program, I am making this change to bring the Bandy 20 Index closer to the standards laid out by the Global Investment Performance Standards (GIPS). Although the idea of measuring performance on a non-standard quarterly cycle, as I used to measure the Bandy 20 Index, has its merits, I believe it is more important to have a time period that is comparable to other widely accepted time periods. Second, I am going to convert the Bandy 20 Index from a long only fund to a long/short fund, with 20 equities long (with 6% equal weight by value at the beginning of the quarterly cycle) and 4 equities short. I am making the simplifying assumption that there is no borrowing cost associated with shorting equities. So, for example, if I had $100, I would spend $120 to purchase $6 worth of 20 stocks, and raise $20 by shorting 4 stocks for $5 each.
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Historical Results and Commentary