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Why Bulls Should Fear The "Money On The Sidelines"

Tyler Durden's picture




 

Much has been made of equity inflows this week (though we note a significant outflow from high-yield bond funds - just as risk-on in its nature) and once again the money-on-the-sidelines fallacy is hawked at every opportunity. Two critical aspects are important to get past this 'fact' as some positive driver. First, money does not 'enter' the market, it is swapped (e.g. Person A's cash is used to buy shares from Person B; after the transaction the roles are swapped with Person B holding cash on the sidelines and Person A holding shares); and secondly, as Morgan Stanley's Gerard Minack notes, despite all the disclaimers – retail flows assume that past performance is a good guide to future outcomes. Consequently money tends to flow to investments that have done well, rather than investments that will do well.

Via Gerard Minack, Morgan Stanley,

Investing is an unusual profession: perhaps the only one where amateurs have a good shot at beating the pros. However, evidence suggests that amateurs don’t: flow data indicate that retail often buys high and sells low.


Amateurs normally stand no chance against professionals. It’s not just that none of us could take a point off Roger Federer, or a hole off Tiger Woods. Investing is different.

It’s not unusual for the majority of professionally-managed funds to under-perform their benchmark.

 

 

The chart above shows the percentage of US large-cap equity funds that under-perform the S&P500 index. On average, over the last decade 60% of  funds have returned less than the S&P500 (after fees) for a calendar year. Moreover, the share of funds that under-perform increases over longer time horizons: 86½% of funds under-performed the S&P500 on a rolling three year basis to end-2012.

 

US large-cap equity investors are not special in this regard.


 

The chart above shows the percentage of funds in a range of assets that have under-performed their benchmarks on a 1, 3 and 5 year rolling basis. This is Lake Wobegone upside-down.

 

The good news for the professionals is that many amateurs persist in trying to beat the market and, in aggregate, they seem to do a significantly worse job than the professionals.

 

In short, amateurs may be able to beat the investment professionals, but most do far worse. This keeps professional investors in business.

 

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Fri, 05/17/2013 - 18:06 | 3574427 King_of_simpletons
King_of_simpletons's picture

Time to get in.

 

Fri, 05/17/2013 - 18:38 | 3574505 SafelyGraze
SafelyGraze's picture

how we bootstrap this thing is as follows.

we flow so-called "money" from sector A to sector B.

that drives up prices in sector A. of course.

but we keep prices stable, insofar as we can, in sector B. 

there are a couple of strategies for making this work, like using hft and derivatives to levitate B.

but the upshot is that we keep moving the "money" around while incrementally increasing the price of each market. 

http://www.youtube.com/watch?v=grUvZckk7M8

you can do this kind of stuff forever. it's really great.

Sat, 05/18/2013 - 00:52 | 3575288 OneTinSoldier66
OneTinSoldier66's picture

So, they can just get rid of the debt ceiling now then?

Fri, 05/17/2013 - 20:25 | 3574766 Papasmurf
Papasmurf's picture

You're starting to sound like Maria.

Thu, 05/23/2013 - 19:34 | 3594067 MeelionDollerBogus
MeelionDollerBogus's picture

BTFD! buying by the fist-full ... I mean vampire-squid tentacle ... er ... you get the picture

Fri, 05/17/2013 - 18:07 | 3574431 seek
seek's picture

Way off topic, but this has come up a few times in conversations this week and I'd like to tap into the ZH hive mind:

This week, both myself and a couple of friends (we're all high-net-worth types) have been directly approached by our respective "primary" banks where we carry our largest account balances. I myself was offered either business or personal loans, the others were approached to refi mortgages they already had with their respective banks. One of my friends did a spot check online and there's apparently been a large increase in bank-pushed refi requests among this specific class (i.e., people carrying sizable balances with loans at the bank the balances are held.)

Have any of you experienced anything similar in the past week?

It's just a very, very odd set of coincidences and my spidey-sense is tingling that this might be some sort of advanced setup by the banks to pull a Cyprus by hidding some asset pledges in the paperwork, but I don't know, so I'm looking for more data.

Fri, 05/17/2013 - 18:21 | 3574461 HD
HD's picture

Maybe Ben is indeed tapering. Banks may just have to try and earn their money the hard way now.

Fri, 05/17/2013 - 18:35 | 3574497 Nue
Nue's picture

I work at a bank we used to earn money by lending it to credit worthy borrowers and right now those seem to be as extinct as the Dinosaurs.

Fri, 05/17/2013 - 18:38 | 3574504 HD
HD's picture

Sub-prime is back and just as stupid as before.

http://finance.fortune.cnn.com/2013/04/24/banks-risky-deals/

Fri, 05/17/2013 - 18:42 | 3574518 SafelyGraze
SafelyGraze's picture

speaking for the hive, most high net worth individuals recommend refinancing up to your eyeballs until you can't absorb any more of the stuff.

and then buy artwork

Fri, 05/17/2013 - 19:12 | 3574582 BurningFuld
BurningFuld's picture

I have no debt.

Fri, 05/17/2013 - 21:16 | 3574865 Freddie
Freddie's picture

Artwork?  You could have picked up a "naked" Bea Arthur for $1.9 million.

http://www.breitbart.com/Big-Hollywood/2013/05/16/Bea-Arthur-Naked-portrait-sells-for--19-million

Fri, 05/17/2013 - 18:24 | 3574470 Seasmoke
Seasmoke's picture

My wife , who is not high net worth , although she "owns" 3 houses has been getting these same calls the past couple weeks/months.

Guy was persistent enough that I got on phone and told him I do not trust him as far as I can throw and I will never do anything the banks wants ever again.

Fri, 05/17/2013 - 18:36 | 3574498 reload
reload's picture

'Sudden debt'  said earlier in the week his euro land bank had advised him to pay down his mortgage with money held on deposit. I had the same thing in the UK, I also had a call from my business bank reminding me that deposits over £85k are uninsured. Connected? I have no idea, but as most of the excess in my business accounts is destined for the Tax man anyway I might pay him early, if it gets corzined I bet I would still owe it! If anything I wondered if the bank staff were actually giving out decent advice for once, reducing deposit size......and debt....on a bankers advice? Strange days indeed.

 

 

Fri, 05/17/2013 - 20:49 | 3574815 css1971
css1971's picture

if it gets corzined I bet I would still owe it

Of course. Your bank account is an investment in a bank, it aint't the tax man's problem if you made a bad investment and lost all the money you owe him.

Fri, 05/17/2013 - 22:02 | 3574979 August
August's picture

"the Tax man... I might pay him early, if it gets corzined I bet I would still owe it!"

 

Unless you plan to stiff your taxing authority (and somehow make it stick), I agree with your musing.  It's not like I want to park my cash in equities, bonds, CDs, forex or even PMs, if I know I have Uncle Sugar waiting for his payment.  Of course, any overpayment made to Uncle might take a quite a while to be refunded....

Fri, 05/17/2013 - 18:52 | 3574542 Nue
Nue's picture

Are the Banks in question TBTF's  I work at a bank and have not heard any rumors of a Cyprus event yet, but were to small to be on the FEDS "Friends with Benefits" list.  

Fri, 05/17/2013 - 20:13 | 3574733 seek
seek's picture

TBTF (Citi) and near TBTF (BMO), I don't know the third.

Fri, 05/17/2013 - 20:56 | 3574830 css1971
css1971's picture

They don't need to do that. They took your money. They spent it already. They don't have it any more. You've got a book keeping entry.

If the bank folds your money is already gone.

Thu, 05/23/2013 - 19:22 | 3594034 MeelionDollerBogus
MeelionDollerBogus's picture

It's want, not need. The idea is the pledge of additional work-hours in the form of fiat - the money of the day - or whatever you do to make "money".

Fri, 05/17/2013 - 21:04 | 3574839 barroter
barroter's picture

Similar experience. I was depositing a check when the girl behind the counter "excuses herself" and off to the branch manager she goes. He comes back with her to shake my hand and tries to finagle an appointment to "discuss the various investment options the bank had available."  I declined that moment ( I lied about going to a funeral) and never called the guy back.

I figured the teller was told to alert the manager whenever someone like me, (comfortable, not the top 10%) should come into the lobby.  Not her fault.

My inner smoke detector went off like an air raid siren.  I'm sure he has many bank investment options that are written to favor his bank.  And I'm sure his regional is breathing down his neck to increase sales of these one-way-profit products as well.

Sorry, if your investment vehicles needs an Egyptologist to decipher the 30 pages of legalese, I'm not biting.  Why bother with the Egyptologist? I already know the contract is written so that the bank wins, and I bear the loss.

Fri, 05/17/2013 - 18:16 | 3574453 Dr Benway
Dr Benway's picture

So why should bulls fear the money on the sidelines? Because it is running out? LOL plenty more to be printed.

Fri, 05/17/2013 - 19:03 | 3574562 Iank35
Iank35's picture

As the article says, there are no buyers without someone willing to sell. So why would ANYONE be selling in a 'bull' marlet? The professionals are the ones doing the selling to the amature, taking profits,  and the professional will be the one buying back after the great sell off.......At least I think that's what the point is....

 

 

 

 

Fri, 05/17/2013 - 19:27 | 3574615 Dr Benway
Dr Benway's picture

Well you can churn prices higher without net sellers. Or you can issue more shares, issue billions of shares that you can then buy back with borrowed money to inflate the share price even further. Still not sure what the headline is trying to say.

Fri, 05/17/2013 - 18:49 | 3574533 Dr_Lucid
Dr_Lucid's picture

Side question.  I just went through some asset allocation models with an asset manager and it was the same.  They were behind the benchmarks for the 3yr and 5yr tranches, but ahead in the 1yr.  I'm toying with the idea on where to park $500,000 other than cash.

These asset allocation pdf's all show the benchmark composition.  No funds are over the benchmark net of AUM fees.  So why doesn't everyone just buy the benchmark?  For example, in one case the asset manager was on average 50 to 150 basis points behind the benchmark ( inclusive of their 1% AUM fee).  The allocation as a no brainer.....95% Russell 3000 and 5% cash. 

How cool would it be to sit back, buy one ETF and beat the market for 5 years?  Is that era over?

Fri, 05/17/2013 - 18:57 | 3574550 Dr Benway
Dr Benway's picture

Passively buying market index will continue to beat managed investments on average, will always do so because of fees and the zero sum game of trading. But what good is that if the market tanks? You should toy that idea carefully.

Sat, 05/18/2013 - 21:37 | 3575659 Harlequin001
Harlequin001's picture

Dr Lucid, when you buy the index you are buying what the manipulators did AFTER the event ie the market responds to jawboning and fraud in its own way. A fund manager has to second guess or front run what he thinks the manipulators will do, not just what he thinks they should do. There is no way they can win, but then again if you buy the index you are buying what the manipulators did for as long as its successful. When they aren't it's total fail, and so are you.

My advice is buy gold and silver while its cheap. If they get it wrong tomorrow and it all crashes at least you will still have gold and silver, provided it isn't held in a bank that is...

Fri, 05/17/2013 - 19:21 | 3574600 fonzannoon
fonzannoon's picture

Dr. Lucid let me take a shot.

On one hand, this market is the classic case to own the benchmark. Every asset manager out there is trailing. The reason being is because they are human and they know this market is full of shit. Some of them are chasing and some are still sitting on their hands. But even if they chase now it's useless. They won't catch it, and more likely they will lose their ass trying.

Every client is now using hindsight and somehow thinking that what has transpired the last 4 years was completely obvious and telegraphed. Bullshit. These were the same people that were running for the exits with their hair on fire and did not want to come anywhere near this market even well after it was on the way up.

Here is what everyone is missing or ignoring. This was a set up. This was the reverse titanic. The bankers told everyone the ship hit an iceberg and threw everyone overboard. Then once 90% of the people were gone, it turns out the ship was fine, and the banks are now partying their asses off on the luxury yacht. Except this time around they are heading for an iceberg and they want those lifeboats back. You need to row back to that ship and jump on the titanic so they can get the fuck off. That is how I see it anyway. Best of luck.

Fri, 05/17/2013 - 21:10 | 3574847 barroter
barroter's picture

nice analogy!

Fri, 05/17/2013 - 21:30 | 3574888 Freddie
Freddie's picture

+100 To Fonz.

Hey Fonz - are you seeing people out there who had sworn off the market prost 2008 finally starting to come back to the markets?  It was really really hard to draw em back to the markets  but I think it may be finally happening.  If so it is a pretty good sign that the end is near.

Fri, 05/17/2013 - 21:42 | 3574916 fonzannoon
fonzannoon's picture

Freddie I see a few usual suspects who now feel the need to tell me what the market is going to do. I have several that are frustrated that they are not doing better. I can understand this, as I am conservative by nature. But even the ones that are frustrated tend to say stuff like "I just want the shit to hit the fan already".

By and large, most of the people I deal with are happy they have maintained and grew their accounts to the extent they have, and just want to believe that their money is safe. They could care less what the market is doing in comparison.

This time is different in that everyone is just sitting around and watching in awe. The ones who are vocally frustrated don't budge when you call their bluff and tell them we should get aggressive.

That is why I think we may go violently higher from here for a while. I think that if the PD's truly want out, they are getting nervous that no one is taking the bait. They tried the great rotation. They whacked gold like a pinata. Now they are just ramping this thing higher. Anything to draw people in.

I truly think the Yen is the wildcard. If their bond market flies off the handle money is going to fly all over the place. Much of it into stocks and bonds. People on here are going to lose their minds before this is over, if they have not already.

Sat, 05/18/2013 - 15:38 | 3576262 Mrmojorisin515
Fri, 05/17/2013 - 19:35 | 3574637 TheEdelman
TheEdelman's picture

Too late to the parking lot.  Your idea doesnt work well for 5yr.  For 5, I'd rather park in a fund and pay (bookie) fees for less risk.  As they have the inside info you dont.  You're paying for protection in those. 

If you go an index, you better go looong.   

Fri, 05/17/2013 - 19:37 | 3574645 fonzannoon
fonzannoon's picture

TheEdelman did that dude answer your mining question to your satisfaction?

Fri, 05/17/2013 - 20:24 | 3574765 TheEdelman
TheEdelman's picture

He answered to his credit...but not to my satisfaction.   He claimed to calculate their (miner) costs based on their (audited... he pointed that out for me) 2012 income statements.  But he cherry picked, err I mean chose, 25% of the 2012 producers in his $1300 cost to extract.  So, its a numbers of selected numbers thing.  

He threw in a reference to Fed injections of $85B/mo and the word "inflation" so I guess that helps prove his case.  sarc

Fri, 05/17/2013 - 20:29 | 3574776 fonzannoon
fonzannoon's picture

i think i saw that answer. i saw he took Barrick's ceo's word for it too. I thought his answer was wishy washy at best.

Fri, 05/17/2013 - 20:35 | 3574790 css1971
css1971's picture

End Of Quarter.

It ended in 2000. If you'd bought and held in 2000. You'd only now be positive 13 years later, and not in real terms given inflation.

Simple truth of the stock market and "growth" stocks in general is that you get money by buying cheap and selling later to someone else who will pay more...The greater fool. That is... The stock market is a pyramid scheme, it only functions because more people are willing to pay more later on in the scam.

Obviously to make money in that situation you have to get in to the bubbles earlier, not later. The easiest way to do that is to buy just after it's crashed or something that is definitely cheap and wait for the next bubble cycle as signalled by the central bank lowering interest rates yet further and devaluing the currency.

Money managers have to be invested, they can't sit there for a year or three and say... "WTF this is a bubble and it's too late to make money in it because it's due to burst". (though apparently this is how Taleb's group operates) Any particular fund is also limited in what they can invest. So they underperform by being the greater fool; late to the pyramid scheme. Also. The US is expensive all round, the pyramid schemes are getting full, but then you don't have to be invested in the US.

You don't have to invest in this manner at all but if you have a quarter end target to meet you are going to be limited in how you can invest.

Fri, 05/17/2013 - 21:39 | 3574910 Freddie
Freddie's picture

Do you remember back around 1999 and Julian Robertson.  He was one of the hedge fund/money manager pioneers with his funds named after cats like Tigers, Leopards and something.

He was/is a very good value investor and at the time had a long track record and largish funds.  Value investing was so F'ed up for about 5+ years because of the internet bubble.  He eventually got fed up and closed his funds. In less than a few months the market tanked.  I remember solid smaller manufacturing companies and even REIT trading at really low valuations especially manufacturers.   They took off after the market crashed.

Sat, 05/18/2013 - 00:25 | 3575263 long-shorty
long-shorty's picture

the best place to put $500k is your own small business that has a double-digit return on capital, and is minimally cyclical.

failing that, the next best place, if you are capable of doing so, is to find a small (<$100 mil) hedge fund with a good track record, solid risk management, and an investment strategy that does not involve picking up nickles in front of a bulldozer, and then do hours and hours of due diligence on the fund (including contact all of the service providers)

if you can't do either of those, index funds are probably not terrible. just choose an asset mix that you can live with whether stocks are up 30% or down 30% in a year. if you change your allocation, you will probably change it at a bad time.

Fri, 05/17/2013 - 19:06 | 3574565 falak pema
falak pema's picture

the implication here is the one eyed lead the blind on WS!

How can the US market survive competitively in a global market with one eyed professionals and blind amateurs?

Fri, 05/17/2013 - 21:09 | 3574665 q99x2
q99x2's picture

Dude got it wrong, Money on the sidelines these days means other central banks that have access to printers. There is no swap. They print that shit sraight from the counterfeiting printers. They then make themselves a buntle by pumping that shit into equities. The other money on the sidelines is corporate buybacks to boost their suicidal CEO and management bonuses.

It is the new way of doing things. Got it from the banksters. That's what banksters do.

Fri, 05/17/2013 - 20:23 | 3574759 Dr_Lucid
Dr_Lucid's picture

Edelman....good point.  I've already seen how some short term bond funds have outperformed ETF's because the "active" managers bumped duration a bit and were able to take advantage of accomodating term structures while ETF"s were stuck in the mud and could not move.  Teh ETF parking lot is jammed.  The 1% - 2.5% bookie fee has left some active parking lots with a little more room.

It would be awesome if the market was on the cusp of the great unwind in terms of active management and blind ETF's.  As they say, paying bookie fees (love that by the way) enables a higher return on the way up and less of a loss on the way down.  So far, on the way up ETF's have had the higher return while active managers have trailed on the equity side.

Only within the last few months have some managers been able to beat the ETFs.  So maybe in an optomistic sense equities will prove to be the next stomping grounds as these bookies get in front of the damage control and actually start to earn some alpha (in terms of less of a loss on the downside).  One can only hope a guy who can move money around as things deteriroate will do better than a robot who can't change the allocation regardless of market conditions ( hence the new love and often repeated rally cry for active ETFs)

A core satelite strategy here with 50% invested in strategic allocations with bookies and a negative offset, 25% in cash to be used as ammo in case of a crash and 25% for tactical asset allocation one might be "ok" over the next 5-10 years.

 

Fri, 05/17/2013 - 20:38 | 3574795 Dr Benway
Dr Benway's picture

But why on earth would you assume that managed investments, on average, would start to beat index in a downturn?

There are numerous studies showing that active managers on average can't beat the market, and especially after fees. Yet people absolutely refuse to accept this, keep wanting to pay the fees. 'Bookie fees' is not the correct term, try 'tea leaf reader fee' or 'witch doctor fee'

Or think about it logically. If big money managers make up the vast majority of trading, how can they on average make any net sum other than zero? If they in effect ARE the market, it is a zero sum game. And after fees, they are less than zero. It is really not that complicated.

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