YOGI BERRA
and
Modern Investing
“If you don't set goals, you
can't regret not reaching
them.”
NEED TO HAVE A CLEAR
INVESTMENT APPROACH AND
GOAL
EXAMPLES OF THE
CONVENTIONAL TRADITION

Popular Works:
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Charles Ellis, “Winning the Loser’s Game” (Fifth Ed.) (McGraw-Hill 2009)
John Bogle, “John Bogle on Investing: The First 50 Years” (McGraw-Hill
2001)
Ellis and Makiel, “The Elements of Investing” (Wiley 2010)
Larry E. Swedroe, “The Quest for Alpha” (Wiley 2011)
Textbook



2012)
Short Works

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Burton G. Malkiel, “A Random Walk Down Wall Street” (10th Ed.) (Norton
Sharpe, Alexander, Bailey, “Investments” (6th Ed.) (Prentice-Hall 1999)
Bodie, Kane, Marcus, “Investments” (9th Ed.) (McGraw-Hill 2011)
Best Work


David Swensen, “Unconventional Success” (Free Press
2005)
2011 Guest Lecture to Robert J. Shiller’s Econ 252: Financial Markets
(Open Yale Courses) http://oyc.yale.edu/economics/econ-252-11/lecture6
"You've got to be careful if you don't
know where you are going, because
you might not get there."
KNOW YOUR LIABILITIES
AND INVEST FOR THOSE, NOT
ABSOLUTE OR RELATIVE
RETURNS TO PEERS
“Baseball is 90% mental. The other
half is physical.”
A good strategy and plan is
essential, but implementation
is crucial
“I never blame myself when I’m not
hitting. I just blame the bat, and when it
keeps up, I just change bats. After all,
when I know it isn’t my fault that I’m not
hitting, how can I get mad at myself?”
Key to investment is to stick
with an investment plan and
don’t panic when it isn’t
working
"It's not too far, it just seems like it
is."
(Yogi giving directions to Yogi Berra's Hall
of Fame Racquetball Club in Fairfield,
New Jersey.)
INVESTING WORKS IN THE
“LONG TERM”, WHERE LONG
TERM RETURN IS RELATED
TO LONG TERM RISK
RETURN GENERALLY FOLLOWS RISK
18%
Small Stocks
16%
RETURN (Arithmetic)
14%
Large Stocks
12%
10%
8%
6%
Int Gov
4%
Long Corp
Long Gov
T-Bills
2%
0%
0%
5%
10%
15%
20%
25%
30%
35%
RISK (Annual Volatility)
Annual Returns
Ibbotsen SBBI 2010 Classic Yearbook
Expected vs Actual Frequency of Annual Returns
Frequency
5 Year Rolling Returns 1871-2008 (log)
30%
30%
25%
25%
20%
20%
15%
15%
10%
10%
5%
5%
0%
0%
-20%
-15%
Expected
-10%
-5%
Actual
0%
5%
10%
15%
20%
25%
30%
35%
40%
Annual Return (log)
Source: Yale University Professor Robert Shiller’s website, as of 12/31/08
Past performance is not a guarantee of future results.
Rolling periods represent a series of overlapping, smaller time periods within a single, longer-term time period. A hypothetical example is the 20-year time period from
12/31/82 through 12/31/02. This long-term period consists of 16 smaller five-year “rolling” segments. The first segment is the five-year period from 12/31/82 to 12/31/87. The
next rolling segment is the five-year period from 12/31/83 to 12/31/88, and so on.
9
“When you come to a fork
in the road, take it!”
DIVERSIFY
SUN
RAIN
TOTAL
Suntan
Lotion, Inc.
60%
-40%
-4%
Umbrella,
Inc.
Combined
(50-50)
-50%
70%
-15%
5%
15%
20.75%
“It's tough to make predictions,
especially about the future.”
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
Jan-07
Oct-06
Jul-06
Apr-06
Jan-06
Oct-05
Jul-05
Apr-05
Jan-05
Oct-04
Jul-04
Apr-04
Jan-04
Oct-03
Jul-03
Apr-03
Jan-03
Oct-02
Jul-02
Apr-02
Jan-02
Daily Price Movement
10%
Daily S&P Price Movements
2002-2010
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
-10%
Monthly Returns
1926-2008 (log)
0.9% Average Return 7.8% Standard Deviation
Frequency
100
100
90
90
80
80
70
70
60
60
50
50
40
40
30
30
20
20
10
10
Expected
Actual
28
%
26
%
24
%
22
%
20
%
18
%
16
%
14
%
12
%
10
%
8%
6%
4%
2%
0%
-2
%
-4
%
-6
%
-8
%
0
-2
4%
-2
2%
-2
0%
-1
8%
-1
6%
-1
4%
-1
2%
-1
0%
0
Monthly Return (log)
Source: Actual returns from Ibbotson’s Stocks, Bonds Bills and Inflation, as of 12/31/08. Expected returns generated randomly using Ibbotson data.
Past performance is not a guarantee of future results.
14
Frequency vs Action in Monthly Returns
1926-2008 (log)
12%
12%
2% of m onths gives 10% of action
5% of m onths gives 20% of action
10% of m onths gives 33% of action
10%
Action
Actual
M
or
e
16
%
14
%
12
%
10
%
8%
6%
0%
4%
0%
2%
2%
0%
2%
-2
%
4%
-4
%
4%
-6
%
6%
-8
%
6%
-1
0%
8%
-1
2%
8%
-1
4%
Frequency
10%
Monthly Return (log)
Source: Actual returns from Ibbotson’s Stocks, Bonds Bills and Inflation, as of 12/31/08. Expected returns generated randomly using Ibbotson data.
Past performance is not a guarantee of future results.
15
SHAPE OF ROLLING DOW jONES DISTRIBUTIONS 1928-2010 (Log)
Daily
184
49
0
Expected
3Y
6Y
“The wind always seems
to blow against the
catchers as they are
running”
Winds, particularly in the
form of transaction costs, are
against use of complicated
strategies
THE SWENSEN “J” CURVE
RESULTS
SIMPLE
COMPLEX
“Few institutions and even fewer individuals exhibit the ability and commit the
resources to produce risk-adjusted excess returns. . . .. No middle ground exists.
Low-cost passive strategies suit the overwhelming number of individual and institutional
investors without the time, resources, and ability to make high-quality active management
decisions. The framework of the Yale model applies to only a small number of
investors with the resources and temperament to pursue the grail of risk-adjusted
excess returns.”
Dr. David Swensen The Yale Endowment 2013 Annual Report at p. 15 (emphasis added)
"It gets late early out
there.”
(Yogi's comment on the glare of the sun in left field at
Yankee Stadium during the 1961 World Series against the
Reds.)
Markets forecast expected
market returns and levels
early
" It ain't over 'til it's over "
(Commenting on the 1973 National League Pennant Race)
Don’t make radical moves
in anticipation of end
“HALF THE LIES THEY TELL ME AREN’T
TRUE."
HEDGE FUND CLAIMS


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Good returns at low standard deviation
 Claim: “Equity Returns with Bond Risk”
 Actual Experience – Less than Bond Returns with Equity
Risk
Good diversifier for portfolio – low correlations with
standard asset classes
 Claim: Decreases portfolio dependence on market risk
 Actual Experience - Doubles down on existing standard bets
Better and Safer Returns in Tough Times
 Claim: “Absolute” Returns
 Actual Experience – Negative returns worse than standard
portfolios
“Slump? I ain't in a slump ... I just ain't
hitting."
“If you don’t know where you are going,
you will wind up somewhere else”
Excess Returns to 55-15-30
150%
HFR Excess
S&P Excess
100%
50%
S&P Excess 37%
0%
-50%
-100%
HFR Excess -100%
1
0
9
8
7
6
5
4
3
2
1
0
9
8
7
6
5
4
2
Ja
n1
Ja
n1
Ja
n1
Ja
n0
Ja
n0
Ja
n0
Ja
n0
Ja
n0
Ja
n0
Ja
n0
Ja
n0
Ja
n0
Ja
n0
Ja
n9
Ja
n9
Ja
n9
Ja
n9
Ja
n9
Ja
n9
Ja
n9
3
-150%
“Third base ain't so bad if
nothing is hit to you."
$1.30
GROWTH OF $1 OVER PAST FIVE YEARS
HFRXGL
PERSI
HFRXM
HFRXAR
HFRXEH
$1.20
$1.10
PERSI $1.08
$1.00
HFRXM $0.94
$0.90
HFRXGL, $0.86
HFRXAR $0.83
$0.80
HFRXEH $0.76
$0.70
$0.60
Ju
n07
Se
p07
D
ec
-0
7
M
ar
-0
8
Ju
n08
Se
p08
D
ec
-0
8
M
ar
-0
9
Ju
n09
Se
p09
D
ec
-0
9
M
ar
-1
0
Ju
n10
Se
p10
D
ec
-1
0
M
ar
-1
1
Ju
n11
Se
p11
D
ec
-1
1
M
ar
-1
2
$0.50
OTHER ISSUES WITH HEDGE
FUNDS
“If you can’t imitate him,
don’t copy him”
Resources required are huge and
complex
Anecdotal reports of success
"We don't throw at .200
hitters."
To impact total fund, need to make a large
commitment to area – at least 10%-15%
Returns have been moderate, at best
“It ain’t the heat, it’s the
humility”.
Hedge funds ultimately a zero sum game, and
have to find the top future quartile performer
in advance
Odds 3:1 against
“The future ain't what it used
to be”
Records of past success often
disappear upon implementation or
hire
“Even Napoleon had his
Watergate.”
"He's a big clog in their
machine.“
For every Julian Robertson, there’s a Julian Robertson
For every John Meriweather, there’s a John Meriweather
For every John Paulson, there’s a John Paulson
"Nobody goes there
anymore. It's too crowded."
A working strategy becomes known and popular
Yogi's opinion of Rugerio's, a popular
St. Louis restaurant where he had once
worked as headwaiter.
“YEAH, BUT MOST OF HIS HOME
RUNS WERE HIT ON ARTIFICIAL
TURF.”
When asked why Johnny Bench hit
more home runs than he did.
Strategies that worked with
small amounts often can’t scale
or incur bigger transaction costs
“In theory there is no
difference between theory
and practice. In practice
there is.”
New strategies that work on
paper blow up when
implemented
"We're lost. But we are
making good time."
Hedge funds make a portfolio
exceedingly complex and difficult
to track, with lots of activity
"A nickel ain't worth a
dime anymore."
Costs of hedge funds are
outrageous
“It was hard to have a
conversation with
anyone – there were too
many people talking.”
Too many claims, rationales, and approaches marketed
under the rubric of “hedge funds”
Switching Benchmarks or Comparables
“Libor +” when cash enhancement was easy
S&P 500 when was worst capital market
Now bond potential returns when S&P outperforms
“You better make it 8, I’m
feeling really hungry.”
Responding to a waitress when
asked into how many slices she
should cut his pizza
Claimed Diversification that worked only when you didn’t need it
“Correlations going to 1”. All equity acts alike in a crisis.
“It's deja vu all over again”

Old failed approaches under new wrappings. E.g. “Macro”, “Multi-Strat”



Managers or firms with purported speculative genius: E.g. “Equity
Long/Short” and “Absolute Return”



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Old: Asian infrastructure in the 90s, Specialty fixed income and derivatives in the early 90s
and 2000s, Portfolio Insurance, VAR
New: Risk factors, Risk Sleeves, Volatility trading, Tail risk insurance, minimum variance
Investments at the tail end of fads or reactions to recent trends

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Old: Jacob Barker, Jacob Little, Anthony Morse, Jesse Livermore, Gerald Tsai, Elaine
Garzarelli, Abby Joseph Cohen, Salomon Brothers, Long Term Capital, Bear Stearns
New: “130/30”, Taleb, John Paulson, High Frequency Trading, “Fast Money”
New untested approaches with theory but no sustained track record


Old: Tactical Asset Allocation, Balanced funds and Bank Trust Depts in the 70s and 80s
New: Strategic Partners, external CIOs
Old: VC after the 90s, Death of value investing in 2001, Internet fad
New: Commodities, Real Assets, Leverage (“risk parity”), non-S&P 500
Industry incented to support – “Where are the customer’s yachts?”
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“2 and 20” fees – Best business people in world, but business isn’t to beat the market
Consultants have a reason for existence and better fee
CIO’s and staff can reach for brass ring - The “public fund MBA”
Boards get more interesting meetings, lunches and dinners