Baldwin: “If you are looking for someone to blame for Wall Street’s excesses, look in the mirror”
I’m not in the business of giving investment advice, but I do feel more comfortable telling people what not to do given how many ridiculous money pits are out there. Besides, in my post regarding the topics of this blog, I gave you some reason to believe that the topics would be fairly fluid. In any case, I’d like to point out an article by William Baldwin of Forbes, called Yield Junkies and the Pimco High. Now, I’d like it said that I have no interest one way or the other in the Pimco High Income Fund, but I do believe that Baldwin is pointing out some fundamental truths about how the “dumb money” (yours) is invested.
First, to the provactive headline. Eye catching indeed, and it contains a kernel of truth. The systemic bias in favor of credit and debt, the artifically low interest rates set by a central bank, the inflationary tactics systematically removing value from the dollar, governmental policies encouraging wild spending over prudence, the institutionalized conflict of interest that is the ratings agencies, etc., all probably take more blame. But for the relatively small portion of the captial markets that involve retail investors, Wall Street’s excesses are at least encouraged by investors making it far too easy for financial institutions to pluck the low-hanging fruit (again, yours).
Now let’s move on to what is, to me, the most compelling argument in the article. Certainly the “greater fools” quote in the third paragraph is powerful, and the idea that you shouldn’t be paying a premium for access to leverage is an important one. But this is pure gold:
(People are paying a premium because of) last year’s results. In the fund’s Mar. 31, 2010 fiscal year it delivered a 215% return, as junk bonds recovered from their depression lows. So what? You can’t buy past performance.
This is an incredibly common investing trap. Yes, there are some investors who are good at what they do, and it is absolutely certain that some are better than others. But survivorship bias is almost never accounted for in the homespun narrative that investors create as a reason to invest with SuperAwesome Fund. So SuperAwesome has done better than the index for five years – maybe they’ve been lucky for five years. (Please remember that I don’t mean to impugn Pimco High Income; this is universal stuff.)
Think about this scenario. If I run a 1-900 number giving sports betting tips, I might send out mailers to my target audience giving them a freebie. But what if I’m wrong? If I pick the Vikings over the Saints and send that out to every person on my mailing list, I won’t get a single caller when the Saints win. Better still to send out 50% picking the Vikings and 50% picking the Saints. But even the half that gets the correct pick probably won’t be impressed enough to call. One game does not a fortune make; that takes being correct on a consistent basis, and compulsive gamblers want results, dammit! So I’d plan to send out mailers over a period of five weeks, with five different groups, all with different picks. Group A will get all incorrect picks, but Group E will get all correct picks. Chances are, I’ll get calls from Group E (and maybe a few from Group D because, hey, 80% ain’t bad), and nobody from Group A was going to call anyway if I had only sent out one mailer.
The ultimate truth is this: I can get everything right without actually getting anything right. When you spend more money calling my 1-900 number than you’ll ever earn with my stupid sports picks, or you buy at the top of my mutual fund right before the bottom falls out, I won’t be there to bail you out. But I will have taken my cut along the way.