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Back in January 2007, Bloomberg Markets magazine did a piece (pdf article) on Peter Thiel (pronounced “teal”) who made his mark in the tech sector and then focused his efforts on his own global macro fund. Peter Thiel was the co-founder of PayPal and led them to a monster exit when eBay bought them. The article has an ultra positive tone which was the vibe in the financial markets back in 2007, the article briefly mentions his Facebook investment.  Some great quotes from the article:

- If all goes well, Clarium might one day manage as much as $10 billion
- If Facebook one day pulls off a deal like YouTube’s, Thiel would pocket about $100 million.

Now in January 2011 the roles have reversed, most articles about Peter focus on his Facebook investment and don’t talk much about Clarium Capital his global macro hedge fund. Recently, Bloomberg online had an article about Clarium and the numbers they presented were jaw-dropping to say the least. Clarium’s assets under management (AUM) have dived 90% from a peak of USD 7.2 billion to USD 681 million, a combination of bad bets and customers hitting the exit button.

He is certainly trying to stem the losses, Peter hired Patrick Kenary from Man Investments. Man Investment’s is the mega alternative investment management firm that practically invented algorithmic trading via their AHL acquisition. Having someone with that pedigree is nothing to sneeze at.

In the end, I’m sure most people are sticking around with Clarium hoping that Peter might have another Facebook type investment where they can roll their assets into. Guys like Buffet, Roberton, Rogers and Soros make investing look really easy but when you got billions on the line it’s a very different ball game then trying to launch/run an internet company.

Within the trading community Trader Vic is a legend. The intersection of financial markets and technology has always fascinated me and Victor Sperandeo has married the two into a highly successful career.

Victor recently announced he was going to give back to the community and teach a lucky few how to trade using his proprietary trading methods. Even more exciting, is my ex-colleague Michael Martin will be presenting with him. Mike and I launched India’s first algo/quant commodity fund back in the day.

The Master Class will be taught in Manhattan in early Feb 2011, if you want more information I recommend checking out Mike’s website – MartinKronicle.

Since the financial meltdown of 2008 I’ve been trying to pull my thoughts together around the idea that long term stock selection is dead. Recently, I came across two articles that really got my thoughts in order.

Article 1: NY Times. Nov. 26, 2010. A Dying Banker’s Last Instructions. Gordon Murray was a hotshot at Goldman Sachs, Lehman Brothers and Credit Suisse First Boston. Even though he was in the business for over 25 years his own finances were pretty haphazard and realized most investment advice is skewed in favor of the advisor. Meaning the advisors select products that maximize the advisors returns not yours. The general theme of the article is that no one can predict the future with any regularity, so why would you think that active managers can beat their respective indexes over time?

Article 2: SF Mag. Dec 2006. The best investment advice you’ll never get. Google can afford to bring in the best investment advisors and they did right before their IPO. Most of the big names said the same thing:

Put your savings into some indexed mutual funds, which will make you just as much money (if not more) at much less cost by following the market’s natural ebb and flow, and get on with building Google.

I couldn’t agree more.

For most people getting an index fund that tracks the entire market is the way to go. I believe picking a basket of stocks today and saying it’s part of your long-term portfolio is just plain stupid, it might have worked in the past but there are to many new factors that might skew the 10-30 year horizon for investing.

Case in point, Skype filed their S-1 document in August with the intention of going IPO very soon. Skype is an amazing technology/service and I have been using them for many years, but would I buy their shares during the IPO? no chance.  Do you honestly think Skype will be around 10-15 years from now? I doubt it, the speed with which internet technologies move, Skype could be outdated in 5 years. An IPO is simply a way for founders to get liquidity, plain and simple. Of course, everyone will point to a Google or the highly anticipated Facebook IPO but those are far and few between.

Let’s forget technology for a while and focus on what made America great – the car industry. If you had GM shares from the first IPO they would be worthless today. In a cruel joke, the US government took over GM and then re-IPO’d the shares in the world’s largest IPO a couple weeks back. I would love to ask those fund managers back in 2000 where GM would be in 10 years.

It’s not just the US, look at the current flavor in India – microfinance.  3 months back everyone was tripping over each other to praise SKS Microfinance and the feel good story of helping poor woman in India make a living. Now the stock is down over 20% because the business model is not healthy…what? SKS has been around for 12 years and somehow in the last 90 days their business model is out of whack?  I would say it has more todo with politics and money, people saw how much money SKS made in the IPO and they felt left out.

So what is an investor to do? As I said before put most of your equity allocation into an index fund and forget it.  Then if you have the urge to gamble, put 10-15% of that equity allocation into investments you track on a daily/weekly/monthly basis. Activities can include trading stocks based on information you get or the latest algo-trading genius or some new IPO to flip. This approach will give you the “feel” of the market and yet have most of your equity investments in an index fund.

Motilal Oswal (MO) one of the larger stockbrokers in India is launching its first structured product the MOSt Shares M50, which is an actively managed exchange traded fund (ETF). ETFs as an investment vehicle are pretty old school in the US where over USD 600 billion are tucked into them.

In India, ETFs are relatively unknown and most of the ETFs have been passive index funds tracking the Sensex or Nifty. Benchmark has been the 800 lb gorilla in the Indian ETF space with their Nifty BeES which tracks the Nifty index. The MOSt Shares M50 is one of the first actively managed ETFs in India. Which means that a fund manager, Rajnish Rastogi, is actively managing the money and can tweak the investment model in real time. According to Rastogi’s LinkedIn profile he “developed the first (worldwide) fundamentally enhanced index and obtained regulatory approval to manage an Exchange Traded Fund (ETF) that tracks it.” If you are looking for more details about the ETF you can visit their site and download the mind numbing PDFs.

For me what is interesting is seeing the ETF space grow in India. ETFs typically have a lower cost (known as expense ratio in the biz) and can be traded via your local stockbroker. When people ask for investing advice, I give them my 3 stage process:

1. Absolute beginner – get an ETF or mutual fund that tracks the index (Benchmark Nifty BeES is an example)
2. Intermediate – broadly invest in ETFs or mutual funds (for example: Reliance Growth Fund or MOSt Shares M50)
3. Expert or gambler – invest directly into the stock market by picking the stocks yourself

I will be tracking the MOSt Shares M50 to see how it outperforms against the Nifty. According to them, they will pick the same stocks in the Nifty 50 index but “remix” the index. Would I recommend this product? Potentially, but I need to see how the ETF stacks up against the index and more importantly does the ETF have enough daily trading liquidity.

For more information on how ETFs got started checkout Wikipedia.

The thud you heard on Thursday was a 1,000 point drop in the Dow which then recovered 650 of those points in a matter of minutes. So what happened?  Within hours, we got to hear all sorts of excuses such as a Citi trader fat figured a sell order for 1 billion instead of 1 million.  Then the next round of excuses were about “algo black boxes” making a bad situation worse.

If these orders were executed within milliseconds, then how the hell are we still trying to figure out the cause 48 hours later.  I’m sure a lot has todo with ECN’s, which is where about 60% of all trades now take place. ECN’s provide a way for traders to be not so transparent with their trades. If algorithmic trading funds are called black boxes then ECN’s are the mother of all black boxes.

What we have experienced over the past 18 months in the financial markets seems to have a similar thread – transparency. The entire CDO complex was opaque since they were not listed on an exchange and only after it blew up did we start to learn what was happening.

True transparency leads to quicker price discovery and that’s the problem. You can’t make a boat load of money if everyone knows what you are doing. That’s the struggle of Wall Street vs Main Street, Wall Street likes the current structure and Main Street wants to open it up. Since the sub-prime meltdown NOT ONE rule has been passed to regulate the CDO market, however the US Government has bailed out Wall Street to the tune of over $1 Trillion.

I really hope the SEC makes an example of this ridiculous 1,000 point dip and specifically names the client, the broker/dealer and where the trades took place. Let the transparency begin with this government inquiry.