Thursday, January 22, 2015

Review Of "Inside the House of Money" by Steven Drobny

I forgot that Youngmoney already reviewed Inside the House of Money and didn't like it, but I skimmed it in one night, so I didn't waste too much time.

Most important conclusion: these interviews support my theory that there are no evergreen investment strategies that will always work. As I said in that essay, having your investment operation in New York, having a Bloomberg terminal, and just being able to do a fundamental or technical screen of stocks were all alpha-delivering advantages once - long ago.

Similarly, Jim Leitner got his start trading currencies in the 80s when markets were inefficient,

"Markets were so much easier in those days. The industry was still in its infancy and mispricings occurred much more frequently. There were so many more currencies to trade. Back then, nobody could keep 4 currencies straight, much less 20."
So then he started an $80 million dollar "high yield versus low yield currency fund." Being able to start the first carry trade fund is like Buffett being able to buy growth stocks at single-digit P/Es. Both are conditions that don't exist anymore because the frontier is closed. He goes on to say,
"Real arbitrage, in the old sense of the word, meant that there was no risk at all. Arbitrage today means a huge amount of risk is required to take advantage of small perceived mispricings.
[...A]ll this money being directed toward macro funds and hedge funds is, in a sense, driving out all the easy inefficiencies that are so well documented. The large inefficiencies [like value vs growth] do not get arbitraged out because there's very little capital that actually gets allocated toward extracting value over multiple years."
One funny Leitner story is he says that his prime broker called him in 1998 just to say they weren't worried about him (unlike other clients), because he was always long volatility. Another interviewee John Porter says,
"[H]edge funds in general are all about leveraged selling of volatility... under immense pressure to perform, so they wan't worry about market distress."
Which I believe is true. The reason is that most investors, and especially institutional investors, want a return pattern that looks like Madoff. And from a hedge fund manager perspective, selling mispriced catastrophe insurance is a great way to make it look like you're making money.

It occurs to me, if a hedge fund manager makes money while consistently being long volatility, there's a much better chance that he's not just a monkey than if he's consistently short volatility.

Two other good points, one from Leitner,
"A really important lesson in investing is that being either too far in front or too far behind is when you get hurt, whereas being right at the edge of the wave is where the money is made."
And one from Scott Bessent, who left Chanos to work for Soros in 1991,
"[Y]ou don't have to be skeptical about everything. Maybe the guys at Starbucks really are good managers and it really is one of the greatest concepts ever. Maybe eBay is the perfect business model. Short sellers can't think that way."
This book is like The Outsiders in that it gets high reviews but is pretty flawed (although it doesn't try to be as much as Outsiders, so it doesn't fail as badly).

People should be suspicious if they enjoy reading books about rich guys. Vicarious success is fun, but are you learning anything? I've decided that business biographies are just selection bias and I'm not going to read them anymore.

So, this book has the selection bias aspect, but it also has the old-news aspect of a book like Risk Arbitrage. Gee, thanks for telling us about some investment techniques that worked when Michael Douglas was still young.

2/5

4 comments:

Anonymous said...

I'm confused...of course there is selection bias. Nobody wants to read about the CEO of the widget factory that made 5% a year for 30 years.

I get the impression that you think all the successful people in this world were just lucky, or "in the right place at the right time". To say that you can't learn anything is to basically say that successful people were just luckier than everyone else. That could be true, but if that's the case why bother trying to learn anything at all?

Taking advantage of the times your living in isn't a crime.

Unknown said...

I get the impression that you think all the successful people in this world were just lucky, or "in the right place at the right time". To say that you can't learn anything is to basically say that successful people were just luckier than everyone else.

The point isn't to say that they're merely lucky, it's to separate what part of their success was a result of luck/environment and what part was a result of skill. Reading about successful investors is fine, but you need to know what aspects of their strategy (if any) are worth copying.

Unknown said...

"A really important lesson in investing is that being either too far in front or too far behind is when you get hurt, whereas being right at the edge of the wave is where the money is made."

While I didn't like Lietner's interview, this is a great quote. The part of The Big Rich that stood out to me was the first chapter where he mentioned several of the people who had made significant oil discoveries but were too early and too thinly-capitalized to hold on.

CP said...

Almost everyone profiled in the book made a huge currency bet that worked early in his career.

But, we have seen that not everyone who makes a big currency bet makes it big!

http://en.wikipedia.org/wiki/Selection_bias

And also the Outsiders review:

http://www.creditbubblestocks.com/2014/02/review-of-outsiders-by-william-thorndike.html