Equities  

Don’t hedge your bets with this book

Doug Kass is a hedge fund manager and prolific investment columnist. This book is a compendium, unfolding in real-time diary form.

Giving credit where due, I was impressed by the inspired warnings Kass made about the excesses in US housing and derivatives in the run-up to the 2008 meltdown. He also gave a clear, brave and correct call to buy equities in early 2009.

However, I doubt reading Mr Kass’s book will improve the returns of most readers of this periodical. This is because Mr Kass writes on the faulty assumption that private investors should trade like hedge fund managers.

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Take this typical sentence for example: “If the above consolidation expectation is on target, gaming the markets will likely hold the key to delivering superior investment returns, especially over the next two to three months.”

This is precisely what private investors should not be thinking about the stock market. They should not make guesses about near-term market trends – in this case consolidation – because, by common consent, no one gets this sort of stuff right consistently. They should not believe that ‘gaming’ the market is a route to superior returns. It is only certainly a route to higher trading costs. And no private investor should care about what the markets do over the next two to three months anyway.

Ironically, Kass makes a genuinely useful observation earlyish in the book: “Many of my most successful hedge fund friends have made their fortunes in buying and holding – namely by discovering investment acorns that rise into mighty oaks.”

But although proffering this persuasive evidence of how to create lasting wealth from investing, he subsequently spends enormous effort in debunking the approach. Kass’s own credo is perhaps best expressed here:

“I have learned over the course of my investment career that the quest for delivering superior investment performance has grown more complicated, as it is accompanied by demands for permanent flexibility, a more balanced view and, usually, a less extreme portfolio construction.”

Actually, this is wrong. Investing has not become more complicated over time – it is just as much about sound judgement and holding your nerve as it always was. In particular, this idea of maintaining “permanent flexibility” is unhelpful. In the end all that means is you feel empowered to change your mind every other day. And that way confusion and disappointment lies.

Nick Train is investment manager of the Finsbury Growth and Income Trust