Thursday, 16 March 2017

Coming of Age

We live in a Golden Age.

In the 2000-01 English Premier League season, the average over-round taking the best available prices from five bookmakers (Ladbrokes, William Hill, Sportingbet, Gamebookers, Interwetten) was 107.55%.

In 2015-16, the average over-round using just one sportsbook - Pinnacle - was 102.04%, and that's the exact same number for this season to date.

Taking the "Best" prices from and the over-round becomes an under-round at 98.17%.

Good luck obtaining the best prices on a long-term basis though, but minimal over-rounds means that even a complete idiot will take longer to lose their shirt today than would have been the case at the start of the millennium.

I'm flying to Philadelphia tomorrow (yes, again), this time for St Patrick's Day and to watch the Six Nations decider between Ireland and England in a decent Irish pub which at least one reader is familiar with, except that the 'decider' is now a dead rubber with only pride and consecutive wins to play for. I'll try to have fun regardless. The lovely, and very fortunate, Mrs. Cassini will be joining me on my travels this time, although her idea of a good time differs somewhat from mine, and will involve spas and massages rather than bars and sausages.

And no rude comments about the latter please. Wings, burgers, ribs and steaks didn't have quite the same rhyme-ability to them.

The blog will also celebrate its ninth anniversary while I'm away. Not a bad run, and back in a couple of weeks, to embark on year ten. And remember:

"Small goals lead to large triumphs"

Monday, 13 March 2017

Crossbars and Conspiracy

Another fine performance for the League Two Away System this weekend, with eight winners from the twelve matches and an 88th minute Barnet goal away from nine winners, a profit of 12.59 points at Pinnacle's Closing Price taking the season total to 45.29 points. 

Only one team priced at 4.0 or less failed to win, with Blackpool perhaps unlucky in that they missed an 86th minute penalty, hit the crossbar, and had a "goal" ruled out after the referee decided the ball hadn't crossed the line, in their match at Wycombe Wanderers. It's a conspiracy! Apparently Christopher Sarginson is not following my advice, but perhaps at least Chris K is. And maybe Joey Barton. The game finished 0:0.     

Although for transparency, I use Pinnacle's Closing Prices, the season summary above does show how much more profitable it can be to shop around, and to shop early. 

The "Best" column above reflects the best price available according to Joseph Buchdahl's site, and for anyone serious about their sports betting, the difference between an ROI of 15.7% and 10.6% is huge. 

Saturday's Luton Town v Stevenage game is a good example of shopping early, with Pinnacle's price on the Away steaming in from 4.69 to 3.89 in the 24 hours before kick-off, one of the top ten steamers of the season, of which five have been winners, and worth 14.52 points (or 20.64 at Best).

Phil commented on my Codswallop post saying:
You're ignoring the fact that if Fund C has a higher Sharpe Ratio, you can leverage it to get greater performance per unit of risk than the index. So you can take the level of volatility up to the expected volatility of the index, and outperform.
The real reason the article is stupid is because no one could predict that it was Fund C (rather than the others) that would have the higher Sharpe Ratio.
The article was certainly correct about the Sharpe Ratio, (I checked the numbers myself and came up with 0.29 for Fund of Funds C versus 0.21 for the S&P 500 Index). 
With a small sample size, and nine is small by most definitions, one outlier can have a big impact, and 2008 was certainly an outlier. Not many years see a major stock index decline by nearly 40%. If that decline had been 31%, the ratios would have been the same, but the key point as Phil says, is that Fund of Funds C beat not only the Index but also Funds of Funds A, B, D and E. Its "success" by this measure looks unlikely to hold longer term.

Friday, 10 March 2017

Corrections and Crashes

James commented on my CFD post, writing:

I agree that market timing is as fruitful as using 99.9% of tipsters but I still wouldn't want to start an index tracker with a one shot CFD at market top.
If you are drip feeding capital into an index tracker then that is okay because in the long run you can do harm. If buying a single contract CFD then market top is not a good idea as you will no doubt need a lot of margin in the short term.
I can understand this attitude from a psychological perspective, but when it comes to stock market trends, when they go on a bull run, the run can last quite a while. 

The conventional wisdom is that a bull market ends with a 20% or greater "correction", but there is no rule that says once this level is reached, it won't carry on falling. 
Indeed this happened relatively recently with the FTSE100, when such a drop was seen on 22nd January 2008 (5,338.70, down 21% from its high of 6,754.10). New lows were then recorded in July, September (now -30.8%), October (-45.7%), and finally (we hope) March 2009 at which point the index was a massive 48.8% down from its all-time high.

It's not until January 2010 that the markets recovers to within 20% of its all-time high, and another 42 months until a new high was recorded.

I guess my point is that even if you wait for a pull back, the only thing you can be sure of is that you are not buying at the top. 

A purchase can be value at the top, just as much as it can be after a drop of 20% or whatever as you can never know for sure where the market will go, at least not short-term. 

Long-term the trend is up unless, as one person cheerfully put it:
The only things that would prevent this from continuing, over the long-term, are things like global thermonuclear war, devastating pandemics that wipe out 50%+ of the population, or the zombie apocalypse
And if any of those events come to fruition, we have bigger problems than our investments!


A rather flawed article by Jared Dillian from Bloomberg poses the question Does Warren Buffett Not Understand Risk-Adjusted Returns? 

It has all the makings of a smoke and mirrors attempt to cast doubt over Warren Buffett's simply stated opinion that:

A number of smart people are involved in running hedge funds. But to a great extent their efforts are self-neutralizing, and their IQ will not overcome the costs they impose on investors. Investors, on average and over time, will do better with a low-cost index fund than with a group of funds of funds.
I'm sure that Warren Buffett understands all too well that risk and returns are related, but the precise terms of the bet chosen by Warren Buffett to highlight his his view was this:
Subsequently, I publicly offered to wager $500,000 that no investment pro could select a set of at least five hedge funds – wildly-popular and high-fee investing vehicles – that would over an extended period match the performance of an unmanaged S&P-500 index fund charging only token fees. I suggested a ten-year bet and named a low-cost Vanguard S&P fund as my contender.
There are thousands of indexes, covering a range of risk levels, so while comparing the returns from a stock index tracking fund against a bond index tracking fund would be meaningless, so is throwing into the debate the suggestion that the degree of risk somehow diminishes Warren Buffett's notion. 

Back to his bet, and so what if the Sharpe Ratio for ONE of the five "funds of funds" had a "superior" score? 
And if you calculate their Sharpe ratios and compare them with the S&P 500, fund C is actually superior to the index. If I were a shareholder of fund C, I would be pretty happy in spite of the under-performance, because I received a better return per unit of risk. In terms of professional money management, that is what you pay for. That is success.
Actually, that is complete codswallop. 

Warren Buffett wasn't talking about risk. Basically he was saying that "having determined your risk tolerance" the optimal way to invest is passively, through a fund tracking the index "of your choice". 

If I were a shareholder of fund C, I would be pretty pissed because of the under-performance, because I received a poor return relative to my risk tolerance. Why pay the extra cost of active management? That is failure. 

Thursday, 9 March 2017

Crumbs and Black October (1987)

Regarding my You Win, You Lose, You Just Can't Choose post, Jamie had this to say:

He has dropped crumbs but not actually explained how he avoids premium charge. It has taken different guises from losing on Betfair and winning on another exchange, to trading on someone else's behalf using their account. If he is making good money trading and avoiding the PC then my feeling is as he is part of the vendor team that provides the Bet Trader software from Racing Traders and he also does them day trading courses also, I can only assume that a deal has been struck between vendor and Betfair. Otherwise I can't see it myself.
The crumb dropper is a Tony Hargraves, a.k.a. @SportsTrader_AU and if he has a special arrangement with Betfair, he should probably just not mention the subject rather than make up the nonsense about losing on Betfair while winning elsewhere. Of course it's quite possible that he isn't in Premium Charge territory anyway, because why would he be costing himself money in the form of time and future profits by teaching others how to trade?   

James commented on my Compensation For Losing post saying:
I have been considering tracking the indices with derivatives. Probably a CFD but not at market top. I don't have spare margin for any near term correction. After a downturn, going in with a 9 month contract and rolling it over at expiry for a number of years.
Needs more research.
CFDs are Contracts For Difference which have their advantages (e.g. higher leverage) but also their disadvantages (e.g. paying the spread on entry and exit).

When the next market correction occurs is anyone's guess - I'm sure an "expert" somewhere has predicted it for just about every month since the current bull market started - and the one who ultimately wins this "musical chairs" of stock market analysis, gets five minutes of fame, is seen as a guru for predicting future market moves until it becomes apparent it was all just a lucky guess.
Trying to time the market is an exercise in futility, a lesson I learned relatively early in life in 1987.

Black Monday, October 19th, saw the FTSE drop 10.84%, and with a little cash to spare, young Cassini, barely out of short trousers, decided this was a prime opportunity to put on his big boy trousers, and pile in to buy some great stocks at now bargain prices.

Cue Black Tuesday, and an even bigger loss of 12.22%, which remains the worst one day percentage decline in FTSE history!

Thursday 22nd October saw a further loss of 5.69%, and the following Monday another drop of 6.19%.

It was an exciting week, and while it wasn't the cheapest of lessons, it was certainly a valuable one. 

Wednesday, 8 March 2017

Compensation for Losing

In what version of reality can most of these 'hedge fund professionals' referenced in the article below, possibly think they are deserving of any bonuses? 

Sure, if the fund you are employed to work on beats its benchmark one year, why not reward this achievement, but if your investors would have been better off investing in a low cost index tracking fund, i.e your advice cost investors money, it's hard to see how you can reasonably justify your claim to a bonus, since you added nothing of value.

When it comes to gambling, there's an old saying:

 “You can't win if you don't play”, or “You have to be in it to win it” 
but there is a contradictory quote:
For most people, when it comes to gambling, they would be better served by following this latter advice, and when it comes to investing, they would be better off by following Warren Buffet's advice, and tracking the indexes.

Here's the article from the pages of CNBC:

Hedge funds, as a group, have a lower return than straight-up market indexes do. But professionals in the industry surveyed late last year still expected to take home better pay in 2016 than they did in 2015 — and an even greater portion think they deserve more.
A majority — 53 percent — of those surveyed said they expected to produce higher overall earnings for themselves in 2016 compared with 2015, according to the 10th annual Hedge Fund Compensation Report. That proportion is slightly lower than the year before, where 56 percent said they were expecting an increase in total compensation.
And during a time where the industry has caught the ire of many investors — including Warren Buffett, who last week described the industry's fee structure as "obscene" — an even greater percentage of fund managers reported being unsatisfied with their compensation for the year. Sixty-one percent of respondents aren't happy with what they made.
The report is based on information gathered in the fall from hundreds of partners, principals and employees from more than 200 of the largest hedge fund names, including Och-Ziff Capital and AQR Capital Management. The study also includes some of the smaller names that encompass a large portion of the industry.
That optimism on pay comes amid another lagging year in performance. The HFRI Fund Weighted Composite Index, which tracks various strategies of hedge fund performance, gained 5.45 percent during 2016. That compared with a 10.5 percent increase in the Standard & Poor's 500 index.
Still, the report showed a greater correlation between fund performance and bonus pay than in years' past. Expectations for those employees in firms with lower performance showed lower bonus expectations, and the opposite was true for employees at high-performing firms.
The report showed that among the highest earners, 80 percent of compensation is expected to come in the form of bonuses, which is consistent with prior years. That said, base pay for the highest levels continues to rise, according to the study.
Almost a third of respondents expected the same total compensation as last year, while only 19 percent said that their compensation would be smaller than last year.
"In view of the industry's lackluster average aggregate performance level, it is interesting that a majority of survey respondents still anticipate positive growth in their total compensation," the report said.

Monday, 6 March 2017

Closing Prices

Following on from Chris K's comments on the League Two Away trend, here are the updated numbers for the season's with Pinnacle's Closing Prices through this weekend, which incidentally added another 5.42 points to the total:

On the subject of using Pinnacle’s Closing Prices (PCP), I noticed that Trade On Sports Paul Finn is not using them in his records.

‘Officially’ down 29.40 points this season from 218 games, an ROI of -13.49%, when calculated using PCP, the loss increases to 30.18 points.
The results from the Russian Premier League can't be verified as the league is not covered by, and if we exclude these matches from the results, the 'official' P and L is -47.92 and against PCP, is -48.70 (from 199 matches), and ROI of -24.47%, which means that Paul has a big edge in Russia, a smaller one in La Liga, and a negative edge everywhere else.

The days of services arbitrarily picking their recorded odds should be behind us, but it’s interesting that the recorded price on winning bets beats Pinnacle's Closing Price 72% of the time.

This could be because Paul's Draw selections are driving the price down, although how long this effect might continue as the losses mount, remains to be seen. 

Sunday, 5 March 2017

Creditable Returns

While no readers have attempted to argue against the logic of investing passively rather than in actively managed funds, one person apparently has.

Hedge fund founder David Harding (now THAT's a surprise!) made a very weak attempt to defend his business, but came up a little short.

As one commenter on the Yahoo!Finance article said:
He did not give precise figures for returns. That pretty much says it all.
The full article: 
David Harding, founder of one of the world's biggest hedge funds, on Friday defended his firm against Warren Buffett's criticism of hedge fund fees last week.
Multi-millionaire Harding said Buffett has a "habit of being right" but added that his own Winton Capital business, which manages more than $30 billion, offered lower fees and creditable returns to investors.
Buffett told investors last Saturday that low-cost index funds are a better option for most than paying higher fees to managers who often under-perform, specifically hedge funds.
Harding is one of the first senior figures in the hedge fund industry to respond publicly to Buffett's comments.
"This is withering criticism of the active fund management industry overall, and it is hard to argue convincingly against," said Harding.
But Harding, who set up Winton in 1997, cautioned against tarring all firms with the same brush.
He argued that his Winton's funds have much lower fees than hedge funds are generally assumed to have and that the firm's risk-adjusted returns have been creditable. He did not give precise figures for returns.
Hedge funds made 5.51 percent on average in 2016, compared to losses of 1.12 percent in 2015 and gains of 2.98 percent and 9.13 percent in 2014 and 2013, respectively, according to data from Hedge Fund Research.
Arguing that his firm's returns have been 'creditable' but without offering any data to support that claim, is really a weak effort. His firm may well have lower fees than the average hedge fund, but that's a long way short of refuting Warren Buffett's claim that investing in low cost, index tracking funds is the optimal play for most of us.

I took the time to show how much you would have 'lost' investing 100 units in Hedge Funds versus the S&P 500 using the numbers provided in the article. In just four years, you'd be 33.9% better off with the latter, and that doesn't include re-investment of dividends.