The last installment of the "8 Mistakes Money Managers Make" series on Institutional Investor (www.InstitutionalInvestor.com) was released today. The series has been highlighted in their weekly electronic newsletter and posted on their homepage. The articles focus on poor position sizing's effect on portfolio risk and return. The root cause being a basic misunderstanding of an asset's impact on the portfolio and how it should be used to determine position size.
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4 posts categorized "Institutional Investor"
September 13, 2010
September 02, 2010
Institutional Investor (www.institutionalinvestor.com) will feature a daily article series I authored beginning today. The series, “The 8 Mistakes Money Managers Make,” was highlighted in their weekly electronic newsletter today and posted on their homepage. The articles focus on poor position sizing's effect on portfolio risk and return. The root cause being a basic misunderstanding of an asset’s impact on the portfolio and how it should be used to determine position size.
The initial article, “Mistake #1: Discounting the Downside” is located under the “Asset Management” portion of the website and can be found here. Be sure to visit www.InstitutionalInvestor.com tomorrow for the solution to Mistake #2: The Good Stock Paradox.
December 04, 2009
Here is an excerpt from that article:
To paraphrase Einstein, “matter cannot be created or destroyed,” yet this fundamental tenet seems to be ignored when discussing dividends. Despite the popularity of dividend-paying stocks, serious analysis dictates that dividends are a net drain of company enterprise value. Why are we so confused about dividends? There seems to be a misunderstanding of enterprise value and tax-effect because dividend payments by their very nature have a negative expected return.
If a company has just paid $10 million in dividends then its enterprise value has decreased by a corresponding $10 million dollars. No value has been created in the dividend payment, but investors are quick to praise the merits of a dividend-paying stock. I believe the flawed logic of this problem is ingrained in the dogma of investing…
September 23, 2009
I recently wrote an article for Institutional Investor magazine (www.iimagazine.com) called "Capturing the Benefits of Risk-Adjusted Return." It was a plea to put down the mental calculator. You can read the article here.
Here is an excerpt from the article:
Hedge funds throw away half of their potential returns by not explicitly calculating risk-adjusted return. After working for a fund and having numerous conversations with hedge and mutual fund managers over the past decade, it is obvious that an overwhelming majority of funds’ mistakes come from poor estimation of risk-reward.
In fact, most funds have not explicitly defined an upside price target, downside risk target and conviction level for each investment in their portfolio. This is because most fund managers trust that they can manage the portfolio in their head. They analyze and discuss the upside, downside and conviction level for every investment so they assume these factors’ influence is carefully measured into every decision. But I would posit that there is a distinct difference between factoring in upside, downside and conviction level through mental calculation and measuring it with risk-adjusted return.
Why would you trust your mental calculator for such an important decision? Could you imagine a bungee jumper that knows the height of a bridge, tension of the bungee cord and weight of the jumper but just estimates the correct length of the bungee cord? Absolutely not. For every jump, a calculation is performed to make sure that easily avoidable risk is eliminated. Investors all too often skip the “bungee cord” calculation of risk-adjusted return and end up assuming undue risk.