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Will this Model Replace Wall Street?
“Trader Mark”, publisher of the wildly popular www.fundmymutualfund.com website, is the harbinger of a pioneering, disruptive, guerilla type of fund management that may set the traditional mutual fund industry back on its ear. He was not born into a family well connected with the east coast establishment, did not go to an ivy league school, nor even get an MBA. He has managed to scratch and claw his way into the industry through sheer grit, imagination, and a reasonable fluency in html.
Grounded with a degree in economics from the University of Michigan, he does all of his own research on the Internet. As he has no employees, his operating expenses are effectively zero, mere pennies for web hosting fees and the electricity that comes out of the wall. All of these savings will be passed on to the end investor.
Mark employs a hybrid fundamental/technical, long/short approach to the market which he has developed through trial and error over the last 15 years. It was enough to deliver an impressive 77% return last year through model portfolio tracker, Investopedia. His record enabled him to build a readership of 150,000 a month at his website, and brought him an impressive 13,482 followers at blog aggregator www.seekingalpha.com .
I looked into starting up a mutual fund myself a few years ago and concluded that it couldn’t be done for less than $100,000, and needed at least $100 million in assets to cover operating costs.
Mark will fill out his own forms to register as an investment advisor, having studied .pdf files of the necessary forms at government websites. He will skip the nationwide road show, won’t pitch pension fund investment committees, nor cultivate the fund of funds.
Mark says he can break even with a mere $7 million in assets. His only real outside expense will be an independent annual audit, an item that fund subscribers will happily cover. Mark has already received commitments for this amount from his online followers for a mutual fund he will launch this summer. He is in effect building his own “homemade” mutual fund. Welcome to Internet economics.
Given the vast reach of the Internet, free software, and the bargains in hardware and broad band, it was only a matter of time before a Trader Mark percolated up from the underground. He is doing to fund management what Amazon did to book sales, Travelocity to airline travel, and Napster to the big music companies. He is a disruptive force that will destroy traditional mutual funds, and possibly hedge funds as well, with a bottoms up, zero cost strategy that Harvard business professor Clayton Christensen would applaud. The real game changer is that there are thousands more “Trader Marks” out there, diligently building asset management businesses on home pc’s. Nobody really knows how many for sure.
If there was ever an industry crying out for restructuring, consolidation, and price competition, and ultimately, a whopping great downsizing, it is the US mutual fund industry. It has mercilessly ripped off retail investors with notoriously bloated expenses and spendthrift marketing costs. Conflicts of interest are rampant. Any trainee assistant trader can tell you that more than 90% of all mutual fund managers reliably underperform the indexes, some grotesquely so. Published performance is bogus, as they show a huge survivor bias, not including the hundreds of mutual funds that close each year. And there’s always that surprise tax bill at the end of the year. Even John Bogle, who broke ground with his own innovation in the seventies, the index fund, says that investors in America are at the bottom of the food chain.
Mark believes that the US economy is in a “drugged pleasure dome that kicks the can down the road,” and will bring “another ugly episode in the market.” If the S&P 500 breaks the 200 day moving average, which is looking increasingly likely by the day, he’ll turn on a dime and bail on his longs.
Longer term, Mark likes the small cap mobile technology area, and has traded in Atheros Communications (ATHR), Asia Info Holdings (ASIA), and Dragon Wave (DRWI). China and India have great fundamentals, even though they are getting overhyped. More attractive is Brazil, which offers a small cap ETF (BRF). In the BRIC complex, he’d take Russia (RSX) out, which presents unquantifiable country risks, and substitute in Indonesia (IDX), another resource exporter with a growing middle class that is close to China. Also on his horizon are Australia (EWA) and Vietnam (VNM).
Fidelity, T. Rowe Price, and Dreyfus, beware.
To listen to my interview with Trader Mark in its entirety and get a glimpse into the future, please go to Hedge Fund Radio at my website by clicking here at http://www.madhedgefundtrader.biz/Trader_Mark.html . For more iconoclastic and out of consensus analysis, you can always visit me at www.madhedgefundtrader.com , where the conventional wisdom is mercilessly flailed and tortured daily.
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Not that I'm a fan of the mutual fund industry, but who in their right mind would place money with one guy in a closet playing stock picker? If a publicly available screening tool was the answer to performance, we'd all be retired now.If any system consistantly generated attractive sharp adjusted returns, they would have gathered all available assets long ago.
This model is low cost because he also eliminates that "useless" overhead of compliance and oversight. if "Trader Mark" has a bad day and decides to go all in on a hunch, he doesn't pay for it, his investors do, and no one is there to stop him until it's all over.
The S&P was up 72% from the March lows of 666 to the recent highs, and his return was 77%, on a thoretical portfolio. Investors that are willing to accept the imbedded risks to fund Trader Mark's dreams of being a real trader with other people's money, for a roll of the dice are more adventurous than I.
Hi Anon
First, I respect and understand your position
Second, investing with anyone is a leap of faith
Third, the mutual fund model has been mostly til now a "long only, cash is trash" concept. Hedging is almost not at all hear dof
Fourth, I have been around since 2007 publicly (mid 90s was when I really started in equity markets) so my track record is from mid 2007. We can agree this was possibly the most volatile period in our lives with once in a lifetime multiple sigma events, no?
My 2009 performance is not something I am really touting much - that just so happens to be what was highlighted above. I think a blind dart throwever could of made 35% in 2009.
I was using a different less rigorous tracking system pre 2009 since I wanted something the public could see , and a 3rd party to hold my results. I could not hedge properly
I still was up about 12% from Aug 07 to Aug 08 which put me in top 10 of all equity funds ... not top 10 percentile, but top 10.
I lost that in Sep/Oct 08 and went to 0%. The equivalent of the S&P at the time was -40%. So I was more than happy to protect capital and beat the index by huge amounts. Not to mention peers.
Then Jan/Feb 09 when I could properly hedge I returned about 0%. The market was down about 20% in that time. Then the 77% return came after that in 09.
I am a lot more proud of what i did in 2008 and early 2009 than the 77%
Last, as for your comment about overhead that is what the expense ratio pays for. Its very expensive and smaller funds have to pay for all the same things big funds have to. My expenses will be covered via this route and the only difference on that end is all my results would be reduced by the expense ratio which is capped under 2%. Compliance and oversight are all part of my costs. So I don't see the point of that one line of your argument.
That said, I respect your point, but I know many people in this world do not have the time, education nor acumen to do their own investments. That was the point of mutual funds in the first place. Problem is the growth of the industry happened during a golden bull market of 1983 to 1999. Rather than the 60s. 70s which are more typical. Not to mention the 00s which were atypical for other reasons. So I am trying to fill a niche that til now pretty much has been reserved for hedge funds.
This is the one of the main problems with the way retirement in America is stuctured. Along with brainwashing, market participants via retirement accounts (pick your poison) are locked in long. There is no hedging on the downside. It is a complete rackett.
Mike McDermott would tell you:
First:
If you can't spot the sucker in your first half hour at the table, then you ARE the sucker.
Second:
You can shear a sheep many times, but skin him only once.
The latter quote is of particular importance. The sad thing is is everyone on Wall Street is in on the scam from top to bottom. The mutual funds get paid in fees. The bear Hedgies and traders get paid exponentially when things turn south. Lastly, most importantly, the government is getting paid in the form of taxing all of the above, while the American people get stuck holding the bag of shit...and most don't even know it.
I follow your blog and I understand that you have a different approach to this whole thing, but the mutual fund industry as a whole is totally flawed and is allowing a whole generation of Americans to be looted every 8 years or so.
anonyumous #216185:
I don't time for a long tedious story, but I was the victum a "full service" brokerage in two IRA "Professionally Managed" accounts and, in the form of FNM paper, suggested by my otherwise responsible broker, in a taxable account managed by my broker and myself.
I admit to not watching the taxable account close enough , other than maintaining a hefty cash reserve, but the FNM paper was recommended by the broker. I assume it was at the behest of his management who certainly should have known better. He is normally pretty responsible.
The managers of the IRAs were Brandis and Alliance Bernstein. I got out of the Brandis because they were going down faster than AB but kept the AB for a "reference". Considering that I had not tried to trade stocks or be active in stock picking for several years, two accounts were enough to take on.
With the free charts, common sense and ideas from ZH a SA. I have done better than AB since the time that I started.
I want to find management help somewhere because I am getting older but I fear that the upper management of my brokerage, MS, hasn't learned much. The local broker is a professional a sometimes a source of timely observations but he is dependant up on his house for his paycheck. The house's rankings have not worked well enough in this environment to make them worth while in the long haul.
A second thing is that the function of a Brokerage is to broker deals. If you want to float an IPO for your stock, you get a broker to do it for you and you want the highest price possible. Who does the brokerage house serve? Who is the real paying customer?
Just as the rating agencies (S&P...) should be independant, so should brokers be independant. My past experience, not discussed here, indicates that the real customer is usually the issuer.
If you have an honest reliable, hard working broker, take him to dinner once in awhile, don't expect him to invite you to dinner.
There is no free lunch.
Mark also does the daily market report on Peter Schiff's website, which I appreciate and even occasionally read. ;-)
great highlight of a great website, MHFT.
kudos on the pub / recognition, TraderMark ... and thanks for your insights / efforts.
With a $2,000 forex account anyone can get access to a genetic optimizer and create their own neueral nets. That kind of research capability didn't exist a few years ago, now it is available from your home computer.
I've been reading TraderMark's blog for about a year now. In going down the rabbit hole of understanding the American Ponzi it is difficult to reconcile how the machine is still moving and we've not collapsed already. His approach shows how one can internalize the sorry state of this country's finances and still take advantage of opportunities in capital markets while everyting is more or less functioning.
What I particularly appreciate is TraderMark's insights on government/education/healthcare, the vanishing middle, and growing lower class. Not enough people talk about the poor in this country. Though hardly anyone would describe themselves as poor or lower class, the statistics on foodstamps alone show there is a broad swath of struggling folks in this country that just isn't talked about.
I know lotsa folks on ZH chafe at things that look like mareting or sales pitches, and I hope no one looks at this lil positive missive as such. Tho I do want to convey that TraderMark has a lot of insightful things to say, and folks here can get a lot out of looking into some of his past writings.
thanks "steak"
I will be sending the $50 as agreed to your paypal account for the nice comment ;)
Yes, I try to balance the financial markets away from the Alice in Wonderland stuff but always keep it side pocketed. Eventually it will matter - we just never know when.
In the meantime, I join the chorus whistling past the graveyard as I hang out in the emergency exit area, with my Kool Aid in hand.
As the old saying goes, enjoy the party but dance near the door...
Chuck Prince's (formerly of Citi) infamous last words!
+10
TraderMark, I think you are going to have a very hard time convincing anyone that investing is even a worthwhile activity. Once bitten, twice shy, and being small only makes me wonder whether you are a ponzi or a bucket shop. It's not going to be easy to win people over.
one man can handle admin, research, trading, customer service and everything else? does he eat black bananas? if he did it all from his bed a la Hefner he could stretch out time so long as he never goes to the bathroom. how would he have the time to even perform ablutions?
Hi = thanks for the post MHFT
No the back office stuff is outsourced and a large part of the cost structure. I will just be doing strategy, research trades. Customer service and administration is farmed out to a firm that does that 24/7 for small / medium mutual/hedge funds. Using the same firm as Whitney Tilson.
p.s. Univ of Michigan is the "Harvard of the Midwest" ;) We have Tshirts to prove it...
I have worked with a couple of people with Harvard MBAs and, although they were intelligent and knew their theory, their performance in the real industrial world was underwhelming, leading to reduced survivability.
As an engineer, I have observed that engineers (including me) can tend to become tools of their tools, looking for ways to use their analytical tools/skills instead of a simpler path. I have the impression that many of the illuminati in the economics world have become tools of a rigorous education in theory that is really no more than hypothesis.
Man is a communicating, emotional pack animal that can stampede. How on earth did Merton and Scholes use standard statistics in their models without understanding the fundamental limitations that human behavioral effects imposed on the basic “theory”?
I think it was Stiglitz, discussing the arrogant confidence of Summers and others in a Barron’s after the LTCM affair saying (approximately) “I fear they do not have a sufficient respect for the mysteries of life.“ .
So it may be that educational experiences tempered by deeper exposure to the “real world” mysteries of life will, in the long run, be more useful in "real world" markets.
And, for those that missed it, Summers was on the Charlie Rose (NPR) show last week. For most of the time he rambled on seeming unable to stop talking. Finally, at the close, Rose had a chance to ask about the ethics of the current policies/approaches. Summers said; “I am only a humble economist, not a philosopher…” But I had the impression that he is gaining some appreciation for the “mysteries of life”.
Why do you drive all the way to Chicago to buy Harvard of the Midwest shirts?
lol
I assume a Northwestern grad?
All this tells me is that we will witness a compression in hedge fund and especially mutual fund fees. The days of charging 2 & 20 for leveraged beta, or outrageous MERs on beta are coming to an end. Deleveraging, deflation, means investors are going to scrutinize their expenses more carefully. By the way, I added more top funds to my list of funds I track, so have fun perusing what they are buying & selling. Data is lagged but gives you a good idea at what sectors/ stocks they're looking at.
what's the reason for the data lag?
No Help in Sight, More Homeowners Walk Away
After three years of plunging real estate values, after the bailouts of the bankers and the revival of their million-dollar bonuses, after the Obama administration’s loan modification plan raised the expectations of many but satisfied only a few, a large group of distressed homeowners is wondering the same thing.
http://tinyurl.com/y8lwz2v
Nothing here but an infomercial, not that infomercials are necessarily bad.
I read a lot of Trader Mark at Seeking Alpha and enjoy his perspective very much.
Not sure how scalable Mark's model is. Like Kirk, he tends to flip small cap stocks.
Regarding replacing the massive financial services industry, I would think that everyone but the wealthiest could invest for themselves through a brokerage with ETFs.
Indeed, scalability will be the key, but at $30M in assets for example you don't have to worry about it that much. If you have $800M or $2Billion you have a whole different animal. I envision closing the fund at some asset level before it gets too big due to those reasons.
But that is a problem I only wish to have to deal with. ;)
All the best to you TraderMark.
Well done, madhedgefund guy/girl ;>
+1
This is very interesting....
"BIG" is not good when it comes to money management in that the trade performance can be much higher while being more conservative....
Furthermore the "largeness" concept leads to conflicts of interest....and inadequate markets....
Here is perhaps the most important point....
Which would make for a better marketplace ?
5 BlackRock/GS typeorganizations or a billion RETAIL accounts ?
The marketplace itself direly needs to be defragmented....and thus morphed into a seamless worldwide electronic direct access RETAIL exchange...thereby lowering spreads and offering trading all securtiies for no more than 20 cents per 100 units....
The retail box firms offer the average customer to pay for its advertising and real estate ....and lots of people ....
All for nothing....If one owns a computer .....one can run their own account....If one does not have the intelligence to logon....they should not be in the securities market....
a very insightful piece.
Indeed. And it also opens up the potential for an independent third party rating service covering the plethora of these that could emerge, clarifying their skills, focus and suitability for different investors, all the whats and whys, and rating them.