Daily Alpha: Alternative Thinking on Bernie’s Ego, Stock Picking Monkeys and CAPM

Jun 3 2016 | 11:09pm ET

The Daily Alpha: June 3, 2016
By Garrett Baldwin 


"Bernie Sanders es nuestro amigo revolucionario."

That’s Venezuelan president Nicolas Maduro.

This week, Maduro who took some time out of his busy schedule to offer some comments on the state of the U.S. Presidential election. He praises Senator Bernie Sanders as a friend of their revolution.

Nice to see he has some free time while overseeing the economic collapse of the most oil-rich nation in the Western Hemisphere.

Over the last few months, more than two million people have called for a referendum to get rid of his disastrous presidency. He’s slow-walking the process, making sure he can stay in power just long enough that the last light bulb goes out in this glorious revolution.

By the way, Bernie Sanders was recently asked by Spanish-speaking Univision for comment about the economic collapse of Venezuela and several other South American nations who implemented many of the socialist economic policies that the man adheres to these days.

Sanders’ solution: Dodge the questions as if they weren’t asked. Here’s that part of the interview.

LEÓN KRAUZE, UNIVISION: I am sure that you know about this topic: various leftist governments, especially the populists, are in serious trouble in Latin America. The socialist model in Venezuela has the country near collapse. Argentina, also Brazil, how do you explain that failure?

BERNIE SANDERS, DEMOCRATIC CANDIDATE: You are asking me questions…

LEÓN KRAUZE, UNIVISION: I am sure you’re interested in that.

BERNIE SANDERS, DEMOCRATIC CANDIDATE: I am very interested, but right now I’m running for President of the United States.

LEÓN KRAUZE, UNIVISION: So you don’t have an opinion about the crisis in Venezuela?

BERNIE SANDERS, DEMOCRATIC CANDIDATE: Of course I have an opinion, but as I said, I’m focused on my campaign.

Sure. He’s too busy pushing a failed economic policy to address the utter human misery that this system produces time and time again.

Strange for a guy who has praised Castro, Ortega, Chavez, and other leftist dictators in the past. You’d think he’d want to tout all that success happening in those nations people are desperately trying to escape.

You see, Bernie Sanders is like a lot of other socialists out there today.

They argue that socialism can and will work… it just hasn’t been implemented by the right people.

In his mind, he’s Superman.

In reality, he’s just a man who never learned economics or behavioral finance, and he lacked good people around him to tell him that he’s wrong...

“If you're not delivering, there's a fee structure that's set up to deliver superior performance, and if you don't deliver it, your life is going to change. That's not unfair in that sector.”

BlackRock billionaire Steve Schwarzman has more bad things to say about hedge fund fees. While the industry is down and off to a bad start, Schwarzman strolls on past and offers a boot to the gut for good measure. He says that he wishes that his firm was able to get “2 and 20.”

The bigger takeaway from the article? In the last three months of 2015, more than 300 hedge funds shut down. If another net 4,700 hedge funds shut down, K.C. Nelson wins two pounds of Delmonico’s steak.

“Peru has an exceptional track record in international arbitrations and has defeated claims worth billions of dollars and obtained decisions of over one hundred million dollars in its favor It will defend itself vigorously.

That’s the Peruvian Finance Ministry… on another squabble with hedge funds over bonds.

Why are all these foreign countries getting wrapped up in questionable deals?

“The latest data from Wall Street hedge funds indicates fund investors would have been better off letting monkeys pick their stock portfolio.”

Finally, the financial media is at it again. Boy do they like comparing hedge fund managers to primates when it comes to stock-picking prowess. Today’s latest example comes from Benzinga… but it’s mainly just a click-bait headline.

Where do all these monkey stories come from?

Back in 1973, Burton Malkiel wrote in A Random Walk Down Wall Street: “A blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.”

And 43 years later, stock pickers are still having a hard time beating the market.

But if the monkeys are so good at this, then why aren’t companies selling stock-picking monkeys instead of financial newsletters?

There’s one other bother: There are some writers and economists who act like Malkiel’s book is gospel.

Recently, we heard a story about a professor at SAIS at Johns Hopkins University and his reaction to Malkiel’s theory. In a class he taught at Hopkins on market theory and performance, he would teach Efficient Market Theory and CAPM for two solid weeks and hundreds of pages about Efficient Market Theory and CAPM written in the 1970s. Students complained the exercise was both hellish and boring. They studied it rigorously though – as if it were gospel.

Then, the following week the professor walked into the room, handed out a handful of articles written by Robert Schiller – and told his students to forget everything they’d read in the previous two weeks.

He explained that this was what happened to him and many other people in his graduate programs as Behavioral Finance began its ascent into the mainstream.

Still, despite all evidence, EMH and CAPM are still taught.

One day, Behavioral finance will not be called Behavioral Finance…It will be more appropriately called Finance, a true study of how the world works.

Garrett Baldwin is the managing editor of the Alpha Pages and the features editor of Modern Trader. The views expressed are his own.

In Depth

Royalties: The Alternative Assets of the Music Industry

Jul 8 2016 | 7:01pm ET

Recent market volatility has investors seeking greater insight into alternative...


Vortic: Making Great American Watches Again

Jul 25 2016 | 6:29pm ET

If you are compelled by stories of entrepreneurial vision & drive, or simply...

Guest Contributor

Brexit - A False Economic Divorce?

Aug 2 2016 | 7:44pm ET

The Brexit vote raised concerns about potentially significant economic and political...