Author Topic: How the Rich Outsmart Themselves - ESPN's Gregg Easterbrook TMQ  (Read 3087 times)

eyePod

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How the Rich Outsmart Themselves - ESPN's Gregg Easterbrook TMQ
« on: September 03, 2014, 01:33:19 PM »
Good to see that even ESPN writers are into index funds! Also funny to see similar ideas to MMM on an american football article. :)


From ESPNs Tusday Morning Quarterback - Gregg Easterbrook


"How the Rich Outsmart Themselves: Recently the Wall Street Journal reported that major money institutions, such as the General Motors pension fund and the Harvard University endowment, missed out on the banner stock rally of the past five years -- a 76 percent surge in the S&P 500 -- because they shifted capital from blue chips into hedge funds. General Motors and Harvard would have been better off simply calling the 800 number of Fidelity or T. Rowe Price or any similar "retail" broker that's open to the public, and putting their billions into the most basic S&P index fund. But retail brokerages are for the little guy! Money-management insiders like to rub shoulders with secretive hedge funds run by Gordon Gekko types. That makes the money-management insiders sound more important.

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Twentieth Century Fox
The secret to "secret investing formulas" is that all the money goes to the fund's manager.
Making super-secretive deals -- even if they turn out to be super-secretive bad deals -- is used by money managers to justify their outsized pay. Last week some Harvard alums released numbers the university's money managers have been trying to keep quiet. (The alums are unhappy with the university's self-indulgent use of money. Harvard's endowment is sufficient that every undergraduate could attend free, but instead university insiders live in luxury while alums are dunned for more donations, a topic this column will return to later this autumn with my annual endowment-abuse item.) The alums found that Harvard's endowment has a 324-person staff with an average annual income of $410,000, captained by the recently departed Jane Mendillo, who paid herself $5 million a year. For doing a terrible job! Harvard would have ended up ahead by laying off 323 of its money managers and instructing the remaining one to call the 800 number of Vanguard. But then there would have been no mysticism about secret investment formulas and no excuse to divert huge paydays to unproductive white-collar cronies of Harvard's administration.

General Motors and Harvard are hardly the only ones to take a bath by believing hedge-fund propaganda. The Wall Street Journal reports the California public-employee retirement fund Calpers -- holding about $295 billion, it numbers among the world's major money pots -- blundered by investing in hedge funds: "Average public-pension gains from hedge funds were 3.6 percent for the three years that ended March 31, as compared to a 10.6 percent return from stocks." Calpers would have been better off filling out a form on the Web and putting assets into a basic stock index account.

New York City's pension reserve, which holds only 40 percent of the amount needed to fund promised benefits, has nose-dived since its managers began investing in private equity, an asset class similar to hedge funds. David Chen and Mary Walsh of the New York Times report that some private-equity funds invested in by the city's pension account have lost about half their value during the same period plain-vanilla investments were soaring.

Hedge funds are consistently effective at one thing -- enriching their own top management. Bernard Madoff ran a hedge fund. In 2012, SAC Capital Advisors and Bridgewater Associates, both prominent hedge funds, failed to beat the S&P 500, yet the CEOs of these firms each paid themselves more than a billion dollars for their poor performance. This would seem insane if you were na´ve enough to think the purpose of a hedge fund is to create return for investors. If the purpose of a hedge fund is enriching its own top management, the situation becomes comprehensible.

Many investors steer clear of hedge funds for this reason. But the allure of the secret deal understood only by whispering insiders is difficult to resist. Managers of big pots of money need to pretend they are engaged in super-complex alternative-asset transactions, rather than just investing in the same blue-chip stocks that everyone knows about. The pay and overstaffing at endowments and pension administrations are rationalized on the grounds that only highly paid people could possibly grasp the world of hedge funds. Thus hedge fund CEOs and managers of large institutional money pots have a codependent relationship, each ensuring the other's paydays -- using cash diverted from investors and stakeholders."

http://espn.go.com/nfl/story/_/page/TMQHaiku140902/annual-nfl-preview-haiku-style-tuesday-morning-quarterback

hodedofome

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Re: How the Rich Outsmart Themselves - ESPN's Gregg Easterbrook TMQ
« Reply #1 on: September 03, 2014, 06:23:25 PM »
Hilarious that this article specifically points out SAC Capital and Bridgewater as their comparison to the S&P. Both Cohen and Dalio have so incredibly outperformed the S&P500 since the 80s it's not even funny. The writer of this article is a complete idiot. Take 1 year out of 20+ for a comparison? Come on. How about choosing 2008 when the S&P was down over 30 percent and these guys were flat or even made money? There's plenty of bad hedge funds out there, but I'd give all my net worth to Cohen or Dalio if they'd let me.

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Re: How the Rich Outsmart Themselves - ESPN's Gregg Easterbrook TMQ
« Reply #2 on: September 03, 2014, 06:39:58 PM »
Hilarious that this article specifically points out SAC Capital and Bridgewater as their comparison to the S&P. Both Cohen and Dalio have so incredibly outperformed the S&P500 since the 80s it's not even funny. The writer of this article is a complete idiot. Take 1 year out of 20+ for a comparison? Come on. How about choosing 2008 when the S&P was down over 30 percent and these guys were flat or even made money? There's plenty of bad hedge funds out there, but I'd give all my net worth to Cohen or Dalio if they'd let me.

you'd let Cohen near your money? even knowing how he and his cohorts made those great gains?

Leading to him not being allowed to handle anyone elses money!!

hodedofome

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Re: How the Rich Outsmart Themselves - ESPN's Gregg Easterbrook TMQ
« Reply #3 on: September 03, 2014, 06:44:53 PM »
Whether or not Cohen is directly guilty and responsible for the insider trading at SAC, it doesn't take away from the fact that he is still one of the best traders who has ever lived. He is really, really good. Even with insider knowledge he is good. I'd put him right up there with Soros if they ever had a head to head competition.

Unfortunately I think what happened in SAC is par for the course for most of Wall Street. The game is rigged more than we know.
« Last Edit: September 03, 2014, 06:46:40 PM by hodedofome »