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…this is how JP Morgan shot itself in the arse

The bank’s strategy was “flawed, complex, poorly reviewed, poorly executed and poorly monitored,” Mr. Dimon said Thursday in a hastily arranged conference call with analysts and investors after the stock-market close. He called the mistake “egregious, self-inflicted,” and said: “We will admit it, we will fix it and move on,” he said.

Interestingly it has only take three years since the GFC for a bank to do exactly the same thing again.

WTF is wrong with these people.

WSJ…..

I have written before on how  ordinary the performance is of over hyped hedge fund industry and how the only people involved who get rich are the managers. It seems that the same thing can be said of venture capital investments.

The following is the executive summary of the Kaufman Foundations report on venture investing

EXECUTIVE SUMMARY

Venture capital (VC) has delivered poor returns for more than a decade. VC returns haven’t significantly outperformed the public market since the late 1990s, and, since 1997, less cash has been returned to investors than has been invested in VC. Speculation among industry insiders is that the VC model is broken, despite occasional high-profile successes like Groupon, Zynga, LinkedIn, and Facebook in recent years.

The Kauffman Foundation investment team analyzed our twenty-year history of venture investing experience in nearly 100 VC funds with some of the most notable and exclusive partnership “brands” and concluded that the Limited Partner (LP) investment model is broken. Limited Partners—foundations, endowments, and state pension fund—invest too much capital in underperforming venture capital funds on frequently mis-aligned terms.

Our research suggests that investors like us succumb time and again to narrative fallacies, a well-studied behavioral finance bias. We found in our own portfolio that:

 Only twenty of 100 venture funds generated returns that beat a public-market equivalent by more than 3 percent annually, and half of those began investing prior to 1995.

 The majority of funds—sixty-two out of 100—failed to exceed returns available from the public markets, after fees and carry were paid.

 There is not consistent evidence of a J-curve in venture investing since 1997; the typical Kauffman Foundation venture fund reported peak internal rates of return (IRRs) and investment multiples early in a fund’s life (while still in the typical sixty-month investment period), followed by serial fundraising in month twenty-seven.

 Only four of thirty venture capital funds with committed capital of more than $400 million delivered returns better than those available from a publicly traded small cap common stock index.

 Of eighty-eight venture funds in our sample, sixty-six failed to deliver expected venture rates of return in the first twenty-seven months (prior to serial fundraises). The cumulative effect of fees, carry, and the uneven nature of venture investing ultimately left us with sixty-nine funds (78 percent) that did not achieve returns sufficient to reward us for patient, expensive, longterm investing.

Investment committees and trustees should shoulder blame for the broken LP investment model, as they have created the conditions for the chronic misallocation of capital. …

From a behavioural perspective the question needs to be asked as to why the uber wealthy continually seek out investment vehicles that deliver sub par returns.

Whilst doing a data review recently I happened to chance upon a domestic data supplier who promised to give me “next days data” for only $15 per month. My immediate thought was I would give you 15k per month for tomorrows data. As a flight of fantasy consider the value of such information. At the time of writing the current daily range of the Share Price Index  (SPI) is 55 points with each point being worth $25.

So in the course of a trading week there are 275 points up for grabs. If you managed to capture 90% of these you would take home 247 points per contract. In dollar terms this is $6,187.50 per week, per contract. So if I had ten contracts I would take home $61,8750 per week or $247,500 per month – so you can see why I would be willing to pay $15,000 per month for next days data. Hell, I might even be convinced that day trading actually works.

It may seem that I am being overly critical of a simple error but this form of lazy language is a perennial problem for traders and as those who have done the Mentor Program can attest to I am somewhat militant about the language used to describe the components of a trading system. The problem of loose language raises its head in both system testing and in the construction of a trading plan.

Within the context of system design this problem is known as postdictive error which is simply including information that would not have been available in making a decision. For example when you designing your trading system for testing you inadvertently include data that is not available at the time the trading design is made. A simple example of this form of mistake is to use today’s closing price (or today’s high or today’s low) in calculations that ultimately affect the way you trade today – in effect the system cheats.

This will result in your trading software producing a beautiful looking equity and you entertaining dreams of retiring to Monaco. What is more likely is that you trade the system and end up moving to Launceston, which trust me is nothing like Monaco. These errors are quite easy to fall prey to. For an example of how even very bright people can be fooled by there errors have a read of  The Predictors by Thomas Bass where a group of physicists looking to generate predictive trading models fell into the same trap during one of their data runs.

Within the context of trading plans lazy language can either provide too many choices for the trader or simply not provide firm enough direction. Last year I attended a trading conference where I was due to speak on the simplicity of trading systems. On before me was a fairly well known US trader who during the course of his presentation stated that when ABC happens they then look at one of their eight exit strategies. I happened to be standing up the back when I heard this and the resultant flow of hot tea out of my nose did wonders for my blocked nose. If a position has gone bad then it has gone bad there is no point in having a multitude of possible exits. The trap this trader had fallen into was the belief that somehow the imperfect nature of stops could be engineered out of a system by having a multitude of overlapping stops. In reality what such an approach does is merely overload the trader with decisions at a time when their decision making abilities is very poor.

The other potential problem that poor language generates is a lack of true direction. For example most traders can recite the mantra of riding trends, keeping risk small and cutting losses but when questioned as to the specifics of how this is done they are more than a little vague. Take for instance the tendency of traders to rotate through various indicators looking for something that is akin to prediction when in fact trend following is reactive. This occurs because within their initial trading plan they have said that they will be trend following but they have not defined what they perceive as a trend.

Is it -

1. A change in the long term trend as defined as price moving above a given moving average.
2. Is this moving average plotted a on a weekly or a daily chart?
3. Is a change in trend defined as a stock making a new 52-week high?
4. Is it a combination of the above features?

Each step of a trading plan needs to be carefully elucidated and all points of possible emotional and intellectual debate spelled out in fine detail so that when the time comes to enact the plan the room for internal debate is narrowed. The less room your psyche has to maneuver the more chance you have of following your plan, the more you follow your plan the more chance you have of surviving, the more chance you have of surviving the more chance you have of being profitable.

I was going through my archive of scanned documents the other day and came across this. It is so old I don’t even remember where I got it from.

It is the forecasting record of mutual funds (managed funds) The presumption is that when such funds move into cash they are bearish and when they move into equities they are bullish.  This looks at the movements in the Dow one year after these moves.

The interpretation is that if you had done exactly the opposite of mutual funds you would have been about 15 times better off.