Gyroscopic Investing

Last month, Stan Druckenmiller recounted his own experience with capitulation and performance chasing when he was the lead portfolio manager for George Soros and the Quantum Fund:

“I’ll never forget it. January of 2000 I go into Soros’ office and I say I’m selling all the tech stocks, selling everything. This is crazy... Just kind of as I explained earlier, we’re going to step aside, wait for the next fat pitch. I didn’t fire the two gun slingers. They didn’t have enough money to really hurt the fund, but they started making 3 percent a day, and I’m out. It’s driving me nuts. I mean, their little account is like up 50% on the year. I think Quantum was up seven. It’s just sitting there.

“So like around March I could feel it coming. I just – I had to play. I couldn’t help myself. And three times during the same week I pick up a – don’t do it. Don’t do it. Anyway, I pick up the phone finally. I think I missed the top by an hour. I bought $6 billion worth of tech stocks, and in six weeks I had left Soros and I had lost $3 billion in that one play. You ask me what I learned. I didn’t learn anything. I already knew I wasn’t supposed to do that. I was just an emotional basket case and couldn’t help myself. So maybe I learned not to do it again, but I already knew that.”?

ochotona wrote: Fund managers are under huge pressure to beat other fund managers on a quarterly basis, so they end up imitating the leaders, and as a crowd of lemmings that dive into the sea....

goodasgold wrote: Yes, this is a big problem, even with target date funds. The managers are so intent on beating other target date funds that they make risky bets with their asset allocation, leading to reduced performance when Mr. Market lowers the boom. IIRC, several years ago the manager of a Vanguard bond fund made this same mistake.

madbean wrote:

goodasgold wrote: Yes, this is a big problem, even with target date funds. The managers are so intent on beating other target date funds that they make risky bets with their asset allocation, leading to reduced performance when Mr. Market lowers the boom. IIRC, several years ago the manager of a Vanguard bond fund made this same mistake.

Very interesting comment. Do managers of target date funds really have the freedom to place "risky bests with their asset allocation"? Are you basing this assertion on insider information of how the system really works or is it just something that you believe to be true?

As a software developer (in a financial services company) I can't change any thing without an extensive review process and I would like to think that the manager of a target date retirement fund was subject to similar controls and couldn't just make changes on a personal whim.

My first experience with target date funds was with T. Rowe Price when I got a pension fund rollover from my current employer. That was in 2008 and you can imagine what happened with it shortly thereafter. But I never thought it was the fault of the fund manager for taking risky bets. I figured he was just sticking to the pre-determined asset allocation which for T. Rowe Price is more aggressive in stocks that it is for other funds.

madbean wrote: Very interesting comment. Do managers of target date funds really have the freedom to place "risky bests with their asset allocation"? Are you basing this assertion on insider information of how the system really works or is it just something that you believe to be true?

As a software developer (in a financial services company) I can't change any thing without an extensive review process and I would like to think that the manager of a target date retirement fund was subject to similar controls and couldn't just make changes on a personal whim.

My first experience with target date funds was with T. Rowe Price when I got a pension fund rollover from my current employer. That was in 2008 and you can imagine what happened with it shortly thereafter. But I never thought it was the fault of the fund manager for taking risky bets. I figured he was just sticking to the pre-determined asset allocation which for T. Rowe Price is more aggressive in stocks that it is for other funds.

ochotona wrote: The terms of my settlements require I can't name the firms involved in 2009. Lessons learned.

madbean wrote:

ochotona wrote: The terms of my settlements require I can't name the firms involved in 2009. Lessons learned.

Settlements? You took some legal action against target date funds?

Please do enlighten us to what extent you can without violating your terms, if you don't mind.

ochotona wrote: the other was a high-yield bond fund falsely described in the prospectus as something else.

stone wrote: I liked this [url=http://quote%20http://www.hussmanfunds.com/wmc/wmc150427.htm]quote http://www.hussmanfunds.com/wmc/wmc150427.htm[/url]:-

Last month, Stan Druckenmiller recounted his own experience with capitulation and performance chasing when he was the lead portfolio manager for George Soros and the Quantum Fund:

“I’ll never forget it. January of 2000 I go into Soros’ office and I say I’m selling all the tech stocks, selling everything. This is crazy... Just kind of as I explained earlier, we’re going to step aside, wait for the next fat pitch. I didn’t fire the two gun slingers. They didn’t have enough money to really hurt the fund, but they started making 3 percent a day, and I’m out. It’s driving me nuts. I mean, their little account is like up 50% on the year. I think Quantum was up seven. It’s just sitting there.

“So like around March I could feel it coming. I just — I had to play. I couldn’t help myself. And three times during the same week I pick up a — don’t do it. Don’t do it. Anyway, I pick up the phone finally. I think I missed the top by an hour. I bought $6 billion worth of tech stocks, and in six weeks I had left Soros and I had lost $3 billion in that one play. You ask me what I learned. I didn’t learn anything. I already knew I wasn’t supposed to do that. I was just an emotional basket case and couldn’t help myself. So maybe I learned not to do it again, but I already knew that.”?