I have written several articles over the years about how hedge fund managers are seemingly always bearish.
Ray Dalio A financial crisis has been predicted for years:
Paul Tudor Jones He had been predicting a future for some time:
I think it’s helpful to know that even legendary investors have a hard time predicting what will happen next. If the legends can’t do it, what chance do we mortals have?
Tudor Jones was in the game Invest Like The Best We caught up with Patrick O’Shaughnessy, and it was instructive to understand a hedge fund manager’s mindset when it comes to these picks.
Still worried about the state of the markets. Here are some selected quotes from the interview:
As a country, we experience extreme equality in the stock market. We have the highest individual equity weighting in the history of the country.
The ratio of the stock market to GDP is 252%. In 1929 we were at 65%. In 1987 we reached ~85-90%. 170% in 2000.
The problem is that if you buy the S&P at this current valuation, the 10-year forward return is negative when you buy the S&P with a PE of 22. History shows this.
Valuation is very important and the stock market is really high and looking at the long term it will be really difficult to make money from there.
I have thoughts about the stock market to GDP ratio, but I’ll save those for another time. The important thing to note with predictions like this is that Paul Tudor Jones is a trader, not a long-term investor.
What impressed me about this interview wasn’t his market views, but how he described his investment personality:
For years I would sit there railing against Warren Buffett. I would say he was in the right place at the right time and caught this bull market. Our fund has a negative 0.12 correlation with the S&P 500 over the last 40 years. So 100% of our returns are alpha. This is the difference between investing and trading. I was thinking why can’t I be Warren Buffett? Just believe in America and who cares when you are down 50% because America will save you. I feel like I’ve been a right winger in the NFL for 50 years, fighting in the trenches every day.
Now the decline makes sense! This is his natural tendency.
This man was very likely to become a merchant. He’s not a Warren Buffett, he’s a buy-and-hold investor. Each discipline requires a different mindset.
This is why hedge fund managers are constantly making predictions about the market.
Tudor Jones said he predicted a depression would follow the 1987 crash. Ray Dalio predicted a depression in 1982, just before one of the greatest bull markets of all time. Stanley Druckenmiller It also makes bearish calls throughout the entire bull market.
What happened?
All of these guys still made tons of money by following these predictions because they did not invest their funds based on these predictions. To be a hedge fund manager you have to be bearish almost by nature.
It’s a personality thing.
Every time a bond fund manager appears on CNBC, he bashes the stock market. Why do you think they became bond managers in the first place?
This is instructive not just for legendary traders and hedge fund managers, but for investors of all shapes and sizes.
You must understand your internal structure to make sure it matches your investment philosophy.
I immediately understood the Buffett/Bogle long-term buy and hold idea. It fits my personality type.
I do not have the emotional structure to be a trader and constantly change my mind. This would make me a wreck just like it would make Paul Tudor Jones uncomfortable investing for the long term like Warren Buffett.
Investing realities are rarely black or white, but rather shades of gray.
The perfect investment strategy is one you will stick with come hell or high water.
Some people are for protection. Some are for buy and hold. Some need a mixture of both.
The first step is to find out what your philosophy is and make sure it blends well with your emotional disposition.
Michael and I talk about Paul Tudor Jones, market cap to GDP, and much more in this week’s Animal Spirits video:
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Further Reading:
Don’t Take Financial Advice From Hedge Fund Managers
Now here’s what I’ve been reading lately:
Books:
