Monday, July 27, 2009

Humble Arithmetic

I posted yesterday the potential real danger of HFT, within it I explained why the next down leg will potentially be more painful, the HFT programs will be in sell mode, but they will have to compete with under performing mutual funds to get out of equities.

In here I stated that even though the averages have rallied some 40% of the lows, the average mutual fund is still looking for daylight. Again its simple humble arithmetic.

"While we are not satisfied with our performance in the last quarter, we are happy to report that we didn’t lose as much money as the average stock mutual fund."

“People often don’t understand why they are still in a deep hole, even after they’ve had a year of great returns,” said John Bogle, the founder of Vanguard and the creator of the first index mutual fund. It is because when your portfolio shrinks substantially, you need an enormous gain, in percentage terms, to climb back to where you started.

The simple reason is when markets sell off, they sell off hard, there is an urgency to get out. Its never like this when markets rally. It might take a stock 7 years to double or triple, but all of those gains can disappear in a matter of months.

The average Mutual Fund was using far to much risk in an attempt to achieve gains.

They were all in Screw The Beta Mode. There is simply not enough Beta Risk associated with stock investing in todays markets for obvious reasons. That like liquidity is not coming back.

Always protect the downside and worry about the upside later.


  1. Thanks for the Article.
    Simple Math that most don't understand.

  2. Thanks for the Article.
    Simple Math that most don't understand.