I was fortunate enough to know several professionals at Amaranth. I say "fortunate" because they were quite pleasent to work with and knew their stuff. I say "was" because they don't answer my calls now. It would be a simple task to join the hoards crowing over the quasi-fall of the fund, but there is a deeper lesson here, and I don't want to neglect it. Abnormal Returns touches on it today by referencing, in true Abnormal fashion, an entirely different and entirely similar discipline. Cooking. Says Abnormal Returns, citing Bill Buford in the New Yorker:
Tim Zagat, the publisher of Zagat Guides, points out that for more than two decades the cost of going to restaurants or getting takeout has risen less than the annual rate of inflation—that it’s much less expensive today than at any other moment in our history to pay other people to prepare our dinner. Never in our history as a species have we been so ignorant about our food.
Abnormal Returns then comments:
Let’s take a minute and think about the world of investing today. At no time in history has it been easier or cheaper to assemble a low cost, indexed, globally diversified portfolio. (This is one of the great accomplishments of the ETF revolution.) The vast majority of investors would be well-served in this approach. However the majority of the media reaching investors serves to tell an entirely different story.
From CNBC, to infomercials to brokerage ads we are constantly bombarded with the notion that investment success is simply a click away. Any one who has read this blog for any period of time knows that we are in the camp that active investing is far from easy, indeed active investing is, in fact, hard. That should not deter an individual from pursuing investment expertise, but they should do so with their eyes wide open.
This analogy is a deft one, I think. Short of the not yet revealed revelation that Amaranth deviated from its investment strategy as defined in its placement memorandum, or that it timed the disclosure of its massive losses to avoid a run on the September 18th deadline for October 31st redemption requests, I find it difficult to point fingers at Amaranth.
I have commented before in these pages on the slow, but sure, creep towards an entitlement to returns in the United States. As if everyone were somehow possessed of the right to above market returns (or even market returns) and anyone who interfered must be arrested, sued, imprisoned or sent into exile. An ignorance about the trade off between risk and return is, I suspect, at the heart of these sorts of delusions. The kind of world view, one that believes that we can apply the laws of thermodynamics to market actors (can't win, can't break even, can't get out of the game) and thereby extract better than market returns from them at no risk to ourselves, seems increasingly acceptable. (Ignoring for the moment that it is the market actor we box in that is expected to pay).
This is the formula that prompts legislators and other demagogues to propose "windfall profit taxes," "poison pills," restrictions on LBOs and causes people to expect that a fund like Amaranth can return 20%+ returns year in and year out without taking the kinds of risks that may, surprise, surprise, blow it up.
It is interesting to me the sort of double standard we apply to these kinds of melt-downs. Take such risks and lose and the Wall Street Journal might cite industry experts with: "To have a relative newcomer… receive so much discretion is just shocking to me." But at the same time we all worship the general who fights against impossible odds and wins. We cheer for the quarterback to completes the impossible pass. We love risk, when we win. We condemn it, when we lose. Half a dozen traders happily piped in with an "I told you they were reckless!" but no one, least of all investors, seems to remember actually being told that until now.
Despite this, it does surprise me that Amaranth bet "half the farm" on one man's game, and it is quite illustrative that Abnormal Returns would run down a New York Times piece (avoid irritating registration via bugmenot) pointing out that there doesn't seem to be a single big winner (or three) on "the other side of the trade," or another firm that took a career-ending injury loss. Amaranth was truly out in the cold on this bet.
Be that as it may I think we need to start to remember what risk/reward is. Particularly as we begin to grapple with the entirely unreasonable expectations that have been heaped on, among other areas, the world of retirement finance by the many blind Barons of Short Termernia. Ignorance in this area, after all, can be lethal.