Why Value Investing is so Hard (Managed Futures Style)

Recently, we came across Meb Faber’s blog post “Why Value Investing is so Hard,” and every word we read seemed to resonate a little too much for us on the Managed Futures side of things.

“ … I mean it goes against everything your behavioral instincts tell you to do.  Buying a stock at all time highs is hard to do, and one reason momentum and trend work.  Buying a value investment is hard for many reasons, a few of which I outline below with a very relevant current example, Russian stocks.”

Meb chose to focus his efforts on Value Investing —  Russian Edition, listing specific examples of why value investing is so difficult.

“1.  All of the headlines are negative.

2.  The investment has declined, usually by A LOT.

3.  All of the trailing fundamentals are really bad.

4.  People can find many reasons why “this time is different” for the value metrics not to be reflective of the current situation.

5.  There is a non-zero risk of the investment going to zero.

6.  It is not popular (or patriotic) to own the investment.

7.  Buying the investment, and it going down more,  would pose serious career risk. (or divorce risk).

8.  The banking consensus is all sell rated.

9.  Flows are out.”

Is it just us, or are these some of the same reasons investors aren’t even considering an alternative investment, Managed Futures, or something similar? Let’s go back through the list and see if the reasons match.

1. All of the headlines are negative.

If you’ve been following our blog at all, you’d know this to be true. Ever since Bloomberg opened the floodgates back in September, we couldn’t look at any financial publication without seeing some bad press about Managed Futures. See our Rebuttal.

2.  The investment has declined, usually by A LOT.

There’s no doubt Managed Futures performance has struggled the past couple of years since the 2008-2009 financial meltdown.  Volatility has been contracting ever since then, and it hasn’t found a way to uncoiling yet. Not to mention, as a whole the asset class is in a generational drawdown.

4. People can find many reasons why “this time is different” for the value metrics not to be reflective of the current situation.

Stocks are coming off their all time highs, everyone else’s 401k Stock fund allocation is well above 50%, and in the word’s of the Reformed Broker, “Everything is Awesome.” But it makes us question, “Does the market have a Phil Mickelson Mentality?

6.  It is not popular (or patriotic) to own the investment.

There’s no better way of proving this then our most recent article, “What a Hedge Fund Failure Looks Like.” Paul Tudor Jones made the decision this past month to close its Managed Futures Fund, not because performance was all that bad, but because of the game of growing assets. The Tensor Fund went from over $1 Billion ($1.5 per our numbers) down to just $120 million times over the last three years, and that is the reason the fund is closing, not anything to really do with performance, the skill of the manager, or expertise of the team. The closing of Tensor is more of a commentary on investors buying in at the top of a cycle and getting out at the bottom than anything else.

7.  Buying the investment, and it going down more,  would pose serious career risk. (or divorce risk).

Yes, buying anything with the fear of it going down further is a risk. Managed Futures is already at a generational drawdown. There’s truly nothing saying it won’t get worse before it gets better, or that it is in the process of turning around, but committing to an asset class that has struggled recently is a difficult task.

9.  Flows are out.

It all depends on how you look at AUM, but if you choose to not include Bridgewater & Winton in the discussion AUM growth has been struggling since 2009.

The point is, we see that managed futures is “that” value investment right now. However, that doesn’t mean things are going to stay the same. In fact, that’s the whole point of value investments, and the point Meb is trying to make. You know that it’s not going to stay this way forever, so why ignore it?

One comment

  1. Thank you for this thorough analysis on value investing. I agree with the author that true value investing is not easy to do because it is psychologically dificult to leave the herd and free your mind.

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Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

Disclaimer
The performance data displayed herein is compiled from various sources, including BarclayHedge, and reports directly from the advisors. These performance figures should not be relied on independent of the individual advisor's disclosure document, which has important information regarding the method of calculation used, whether or not the performance includes proprietary results, and other important footnotes on the advisor's track record.

Benchmark index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship, self reporting, and instant history.

Managed futures accounts can subject to substantial charges for management and advisory fees. The numbers within this website include all such fees, but it may be necessary for those accounts that are subject to these charges to make substantial trading profits in the future to avoid depletion or exhaustion of their assets.

Investors interested in investing with a managed futures program (excepting those programs which are offered exclusively to qualified eligible persons as that term is defined by CFTC regulation 4.7) will be required to receive and sign off on a disclosure document in compliance with certain CFT rules The disclosure documents contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA, as well as the composite performance of accounts under the CTA's management over at least the most recent five years. Investor interested in investing in any of the programs on this website are urged to carefully read these disclosure documents, including, but not limited to the performance information, before investing in any such programs.

Those investors who are qualified eligible persons as that term is defined by CFTC regulation 4.7 and interested in investing in a program exempt from having to provide a disclosure document and considered by the regulations to be sophisticated enough to understand the risks and be able to interpret the accuracy and completeness of any performance information on their own.

RCM receives a portion of the commodity brokerage commissions you pay in connection with your futures trading and/or a portion of the interest income (if any) earned on an account's assets. The listed manager may also pay RCM a portion of the fees they receive from accounts introduced to them by RCM.

See the full terms of use and risk disclaimer here.

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