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  1. Wednesday, June 15th, 2016
    programmed or nonprogrammed

    I came across a handout from an information systems class that I took more than forty years ago.  The front page had a grid that was based upon the work of  Nobel laureate Herbert Simon from 1960.  Here it is:simon_figure

    As I looked at it, I started to think about investment decision making.  Using this grid, are investment decisions programmed or nonprogrammed?  Are they more often “routine and repetitive” or “one-shot, ill-structured, and novel”?  There are different camps of belief.  For example, someone who believes in indexation has chosen to own “the market” today, tomorrow, and forever.  That’s as straightforward and programmed as it gets.

    But the categorization as presented primarily made me ponder the boundaries of quantitative investment management (programmed) versus fundamental management (nonprogrammed).  Quantitative approaches have been around a long time — thirty years ago there were simple versions of much of what is ... continues

  2. Tuesday, May 24th, 2016
    a best practice for funds

    “One of the great legal fictions of Wall Street is that mutual funds are independent of the companies that create and run them.”  So said Floyd Norris at the top of a 2010 column.New York Times | The article concerns a court case regarding Janus and the mutual fund trading scandal earlier this century.

    “Is Your Fund’s Board Watching Out for You?” was the title of an article a couple of years later in the Wall Street Journal.Wall Street Journal | The piece looks at the poor performance of Charles Schwab’s YieldPlus bond fund during the financial crisis to talk about some of the issues regarding mutual fund governance.

    Whenever mutual funds run into trouble of one kind or another, questions about the responsibilities of mutual fund boards come to the fore.  Just in the last few months, developments at Sequoia Fund and Third Avenue Focused Credit Fund have drawn attention to them once more.

    I have some thoughts about the responsibilities of those ... continues

  3. Sunday, April 17th, 2016
    starting somewhere

    “You have to start somewhere.”

    I hear that quite a lot when I ask why those trying to select managers begin with some kind of a performance screen.

    In fact, if you read the materials of firms who are in the business of selecting managers, you’ll often see similar statements.  For example, from Litman Gregory:  “We have to start somewhere and so, like everyone else, we often begin by screening for funds with compelling long-term track records.”Litman Gregory | The article is titled, “How We Seek to Identify Great Active Managers.”

    “Like everyone else.”  Yes, it is the place where almost everyone starts.  At least “long-term” was in there with italicized emphasis; that is a bit more defensible, but only modestly so.  Another pieceLitman Gregory | This is a more step-by-step overview of the firm’s approach. from the same firm contained this warning, also in italics, “The problem is that past performance is ... continues

  4. Wednesday, March 23rd, 2016
    work issues

    The February 28 edition of the New York Times Magazine was titled “The Work Issue.”  The articles within it received widespread attention, especially the lead one about Google studying what makes for “the perfect team.”New York Times Magazine | Yet another example of the supposedly moribund mainstream media driving the discussion.  The best content often comes from the same old places.

    While perfection is a lofty goal, its research showed that the best teams tended to have two things in common.  “First, on the good teams, members spoke in roughly the same proportion, a phenomenon the researchers referred to as ‘equality in distribution of conversational turn-taking.’ . . . Second, the good teams all had high ‘average social sensitivity’ — a fancy way of saying they were skilled at intuiting how others felt based on their tone of voice, their expressions and other nonverbal cues.”

    In contrast, a group of very smart people ... continues

  5. Tuesday, February 23rd, 2016
    shared delusions

    It shouldn’t be too controversial to say that an investment program ought to be grounded on reasonable expectations.  Asset owners and the asset managers who serve as their agents should proceed together with realistic notions of the possible outcomes — and the probable ones.

    Aspirational goals might seem attractive (who doesn’t want to generate out-sized returns?), but are likely a ticket to failure, not success.

    I bring this up because of a posting by Charlie Bilello of Pension Partners,Pension Partners | It’s called “The Hedge Fund Myth,” although my point is not limited to hedge funds. which begins with excerpts from mandates written by asset owners that are looking for hedge fund managers.  The expectations are twisted, to say the least.

    Several mention the need for a good “pedigree.”  While there have been many stories of people who left a successful firm and went on to create one of their own, there are many disasters too.  ... continues