The portfolio lost 0.1% for the month of July, bringing our year-to date return to 16.1%. The portfolio lost 4.7% for the month of August, bringing our year-to date return to 11.5%.* We are disappointed to hand in two losing months in a row, especially one of the magnitude of our August loss. It is perhaps overly simplistic to note that our shorts outperformed our longs - though fundamentally that's what happened. The market rose, while China didn't. Corporate bond spreads tightened, but yields fell as well. Gold didn't do much of anything, while neither did oil.
In July, we took the step of adding two single-share relative value trades to the portfolio. You may remember we swore off single stocks some time mid last year, and that in the early months of 2009 we had great confidence that this year’s returns would come from asset allocation. As the market felt to be in a recovery mode, with shares bounding upward and bid/asks narrowing in many sectors, we thought it was a good time to get into relative value. Certainly we had been surprised by the rapid recovery in equity prices, but couldn’t we at least capture some profits from laggards in the rally? We invested in two stocks, which appeared quite reasonably valued and potentially able to benefit from continued stock market strength. On that trade, we have experienced our fastest loss rate of any position so far this year. We are considering increasing the size of our trade.
We are sad to report we have lost our confidence in the “science” of economics. Until recently, we had an unwavering faith in a classical, Adam Smith-type economic model. Then suddenly the penny dropped. To be considered valid, a scientific theory must not only have explanatory power, but also predictive power. Our classical model of economics appears to have great explanatory power, but outside the most facile cases is useless for predicting future effects. What do we do now? Become complete economic nihilists? We're trying to get through Keynes as a bit of self-help, but he's not quite the entertainer Smith was.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
In July, we took the step of adding two single-share relative value trades to the portfolio. You may remember we swore off single stocks some time mid last year, and that in the early months of 2009 we had great confidence that this year’s returns would come from asset allocation. As the market felt to be in a recovery mode, with shares bounding upward and bid/asks narrowing in many sectors, we thought it was a good time to get into relative value. Certainly we had been surprised by the rapid recovery in equity prices, but couldn’t we at least capture some profits from laggards in the rally? We invested in two stocks, which appeared quite reasonably valued and potentially able to benefit from continued stock market strength. On that trade, we have experienced our fastest loss rate of any position so far this year. We are considering increasing the size of our trade.
We are sad to report we have lost our confidence in the “science” of economics. Until recently, we had an unwavering faith in a classical, Adam Smith-type economic model. Then suddenly the penny dropped. To be considered valid, a scientific theory must not only have explanatory power, but also predictive power. Our classical model of economics appears to have great explanatory power, but outside the most facile cases is useless for predicting future effects. What do we do now? Become complete economic nihilists? We're trying to get through Keynes as a bit of self-help, but he's not quite the entertainer Smith was.
* We report the percentage gain or loss during a month in an additive sense for ease of comparison, however the year-to-date returns are reported as a chained series. As the total return become greater, and as inflows have an effect on the portfolio, the two will diverge. Adding up the monthly returns for the year may not give the precise total return.
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