Mike Kane's  Instablog

There are some things in this world that baffle us. One of them is how people who can flush billions of dollars down the toilet can get a second chance. Case and point- Kenneth Griffin, who runs Citadel Investment Group. As reported by the Wall Street Journal, Griffin lost investors over $8 billion last year, with a 55% loss in their main fund offered to clients. Now he is on a globe trotting expedition to raise a ton of more money, open up more funds, and even start an investment bank. In any normal circumstances a 55% loss would mean the end of a career. Yet, somehow people believe he deserves a second chance because of his "track record."

Its similar to a woman who has been battered by her husband giving him a second chance. Well, men won't change, and neither will this manager. Someone who can lose 55% of client's money cannot be trusted. That goes for a hedge fund manager such as Griffin, or a mutual fund or financial advisor that us mere mortals rely on. Was 25%, 35%, 45% not good enough? What's the point of having a "hedge fund" if you aren't going to do any hedging?

There is a huge lesson in all of this for retail investors. We continually hear about the "explosion" in the market this year, and Griffin certainly capitalized on that. His fund is up 58% year to date. Some may think that his 55% loss last year was made up for by his 58% gain this year. He must be up 3% overall. 

But with some simple math we all know this is not the case. His fund is still down nearly 29%. In fact, to make up for the 55% loss of a year ago, his fund will need to return a staggering 122%. This is the importance of looking at drawdowns, even when examining a mutual fund, ETF, or an independent advisor's track record. Drawdowns are the peak to trough loss in an investment over a certain period of time. It is the most overlooked and miss-understood of all the investing metrics. For example, the S&P 500 (SPY), has a 55% maximum drawdown over the last 5 years. Gold (GLD) has a 30% maximum drawdown over that time period.The CGM Focus Fund (CGMFX), a popular mutual fund, has a 67% maximum drawdown over the last 5 years. Comparatively, The PIMCO Total Return Fund (PTTAX), run by Bill Gross, has a 7% maximum drawdown, with similar returns.

When you are managing your own portfolio, it is just as important to admit defeat and take a small loss, as it is to make the right trade and lock in a gain. Losses seen by Griffin will sink any portfolio, and there is no smooth talking that can get around that fact. Drawdowns are like quick sand, the more you struggle, the deeper you sink. Don't let anybody fool you, it is never acceptable or necessary to lose that much money.

Disclosure: No Positions

In this era of 24 hour sound bites, its hard to get an accurate description of what the pundits are saying. One minute we're out of the recession, the next we're in the middle of Armageddon. Case in point, Nouriel Roubini, the famous NYU professor. Everybody wants his opinion, but the end result is somewhat muddled.

Its about time Roubini makes up his mind. Today he correctly stated that the unemployment problem in this country is disastrous, but he needs to be more clear with his outlook, especially now that the markets tend to move when he speaks. Sometimes he states that we are headed for a V shaped recovery, but then other times he states that things will get a lot worse-

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As we expected a few months ago, it looks like Dow 10,000 has brought a lot of money that was on the sidelines back into the market. This is what caused some measure of volatility in the last week. Emerging markets are being pumped up along with commodities, which is usually a sign that we are getting a little ahead of ourselves. But we shall see.
 
It is going to be interesting to see the inflows into ETFs and mutual funds this quarter. I expect them to be very big. If the dollar starts gaining ground, these inflows might be enough to overcome the huge drag the dollar will have on the economy. In the short-term market inflows/outflows are usually just as important as underlying economic fundamentals, but over the long-term they can be ignored (i.e. the 18 months or so that marked the peak of the financial crisis).

With the official unemployment rate now reaching 10.2%, we continue to ask ourselves a question.
 

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We are rather concerned about the crowded nature of the gold market, for everyone, everywhere is long of gold and bearish of the U.S. dollar”

Those were the words of Dennis Gartman today. For those that aren’t familiar with Dennis, he writes the Gartman Letter, probably the most famous newsletter on Wall Street. We also had Jim Rogers say similar things this week.

Seventeen of 23 traders, investors and analysts surveyed by Bloomberg, are bullish on gold as well. Will gold be similar to oil and rise into the stratosphere based on this momentum? Who knows, but we should watch out and be mindful that gold and the dollar could reverse at any time, and bring the market right along with it.

PIMCO head Bill Gross on the dollar-

"I think the dollar is an over-owned currency. The Chinese, the Asians have basically owned too many dollars for too long. Let's face it, a lower dollar is basically a protectionist barrier. The Chinese are earning zero percent on their Treasury bills or close to it, and they're suffering a depreciating currency at the same time. So their assets are going down by 5 percent to 10 percent a year."

I couldn't agree more, except the dollar is probably due for a bounce at some point soon (more of a trading sentiment than an investing sentiment). Both political parties have favored a weak currency for years. It pushes up prices on imports and drives up earnings of large multi-nationals. Eventually the Chinese are going to get fed up and start dumping our currency/treasuries. Once that happens all hell will break loose.