Frank Boland's blog

As you might recall, Cathie Wood’s ARK Disruptive Innovation fund was up an amazing 60% in 2020.  The S&P 500 was up 16% that year. Thus the fund outperformed the S&P 500 by 46%! Last year it was down 25% underperforming by 50%. But that’s not why I consider the actively managed ETF a hedge fund. It’s because it has the macro based investment style that is often used by hedge funds.  Macro is a top down style attempting to identify a global event that could occur.

Bank of America recently published a chart showing the entire history of long-term interest rates. The piece was titled “The 5000-Year View of Rates & the Economic Consequences.” While not from the dawn of time, it is from the dawn of civilization starting in ancient Suma. The chart showed short- and long-term rates through this time period.

An analyst at J.P. Morgan recently wrote about Amazon, “… next year its business will exceed Walmart’s and become the largest retailer in the world.” Jeff Bezos is already one of the richest men in the world. But what is more startling; his wealth of close to $200 billion or the short timeframe in which it was created? From the time of the industrial robber barons to the knowledge/service-based fortunes of today, no one has ever become so rich so fast. Tim Berners-Lee’s creation of the coding for the internet in 1989 had made it all possible.

Fortunately, it is rare to see anguish on someone’s face. One day in New York, near the end of 1987, I did. The October crash was still vivid in everyone’s mind. As I opened the door of an “upstairs” trading room, I saw a friend at the far end of the long trading desk. He was standing with a phone pressed up against his head gesturing frantically. Prior to going “upstairs,” he had been a specialist on the floor of the exchange. I had seen such behavior from him before, but I had never seen his face that flushed with anger.

It’s what we all hope to own. But if you don’t know what attributes it must have, you won’t find it. First, and foremost, it should be a fairly small business run by an entrepreneur. Personal pride and creativity drive a new business. Secondly, the founder must own a significant amount of stock. Such a C.E.O. has a different mindset than an executive of a large company. They’re also different skills. A large corporation needs business school graduates trained in managing people and product lines.  

The other day I came across an issue of Barron’s, dated January 10^th 2015. The front page headline was titled, “Return of the Stock Pickers.” But it didn’t happened in the intervening six years nor has it in the past 15! The reason is, interest rates haven’t change. Fed funds have stayed at 0% because the two crises – financial and then Covid-19 – happen over that time period. For stocks, it’s been similar to the proverbial theater fire; each individual enters the theater one at a time, but when someone yells “fire,” they all get up and leave together.

My dinner guest had just come into the restaurant, with three attractive young women. As he headed towards me, I thought to myself, “Is this a scene from Charlie’s Angels?” It was late 1987 and we were in an upscale Italian restaurant in downtown Boston. People there probably assumed he was a rock star or professional athlete. He wasn’t. But he had done something no one else had been able to do that year. He was a mutual fund manager who was “sitting” almost entirely in cash during the market crash of October 1987. The financial press had made him a cultural hero. A market wizard.

Every significant bull market has at least one mutual fund manager who becomes rich and famous. A portfolio manager, such as Peter Lynch, can even achieve – for a period of time - cult status. But only, if he or she has the good luck to be at the right place at the right time. Such fame only occurs during a period of low correlation in the stock market. Then a manager can choose individual stocks based on their perceived uniqueness. But that has not been the experience in the market since the debt crisis ended 12 years ago.

According to Webster, “a myth is a popular belief that has grown up around something or someone.” That would make John Bogle and Vanguard’s “passivity” a perfect example of a mythology. There is a belief that John Bogle originated the concept of passive investing with his 1975 launch of the then eleven million dollar Vanguard Index Fund. No, not so. Wells Fargo and American National Bank both had launched index funds two years earlier in 1973.

Imagine if you had just become the chief investment officer of the largest portfolio in the world. While there was no strong objection to your appointment, there was tremendous public skepticism. This recently occurred not at Fidelity Investments, Wellington Management, or BlackRock. None of them has a single portfolio close to the size of this this one. It is a sovereign wealth fund, but not from a country you would expect. It is not Saudi Arabia’s, Kuwait’s or any Middle Eastern nation.