Eric Sprott

Recommended reading, economic debates, predictions and opinions.

Postby bones1 » 26 Aug 2009 11:44

ukridge wrote:And I won't begrudge Sprott credit for having been right so many times in the previous 10 years or so.


Has he? Or, is he just another doom-and-gloomer that gets it right once every 10 years when we enter a recession? People seem to remember the one nutty call that turns out right, and forget all the other nutty calls that were wrong.

People seem to give these nuts way too much credit for foresight, when it really is just the inevitable roll of the dice that eventually goes their way.

But aside from that, I really don't care if he was right 10 out of the last 10 times. He got it dead wrong the last time, and in investing the only time that matters is the last time. Okay, the next time is pretty important too, but we won't know if the world ends and Sprott is correct for another few months.
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Postby scomac » 26 Aug 2009 12:30

bones1 wrote:But aside from that, I really don't care if he was right 10 out of the last 10 times. He got it dead wrong the last time, and in investing the only time that matters is the last time. Okay, the next time is pretty important too, but we won't know if the world ends and Sprott is correct for another few months.


It's not just the call that has to be right, but the timing must be correct also. This thread got me looking at this for interest sake and I found it really quite interesting to look for comparables even though it is generally assumed that Sprott has been singular in his calls.

Looking over Sprott's fund financials on SEDAR revealed that the flagship fund held about 1/2 in gold and silver bullion and the other half in a selection of small cap resource stocks. You could accomplish pretty much the same thing with a 50:50 blend of CEF.A and the Front Street Special Opportunities Fund run by Normand Lamarche. The most telling statistic is comparing performance of the two alternatives with Sprott Canadian Equity retuning 9.06% YTD versus the 50:50 blend of Central Fund of Canada and Front Street Special Opps which returned 45.21% after having almost identical rates of return in the previous year with losses approaching 45%. All of a sudden, we see a huge divergence in returns that must be the result of some very suspect timing. What's even more interesting (I think at least) is that I didn't have to data mine to come up with this, it was random. I simply picked a Lamarche managed fund because I knew that he had quite an enviable track record similar to Sprott's and was known for making similar sorts of contrarian investments.
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Postby ukridge » 26 Aug 2009 15:38

Has he? Or, is he just another doom-and-gloomer that gets it right once every 10 years when we enter a recession? People seem to remember the one nutty call that turns out right, and forget all the other nutty calls that were wrong.


As long as I've followed him, the only thing Sprott's been consistently bearish on is the banks. I won't call him a doom and gloomer longer term. (he's certainly been glum the last year or two).

He had a spectacular run of successes prior to his current leg of underperformance. Not sure why you suggest his right calls are somehow freakish. As far as I can tell, the flagship fund is still in the top quartile for 10 year performance. This, despite having lost almost half its value last year, and lagging this year.

scomac, compaisons to a 50-50 split of precious metals and small caps are not relevant, because Sprott makes it clear that he can change the portfolio dramatically. The above combination is where the money happened to be at the time of last report.

All this is not to say I believe Sprott is infallible or special. I still believe more in indexing than in any manager. I responded because it seemed like there was an element of kicking a man when he was down, despite a very good long term record.

As far as fund manager commentaries go, I'd rather read Sprott's than, say, PHN's (althouth I like PHN a lot), because it says something more meaningful than things like "this is a stockpickers' market"!

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Postby Mike Schimek » 26 Aug 2009 17:28

because Sprott makes it clear that he can change the portfolio dramatically.


I'd feel comfortable investing some money with this guy because he knows his stuff, and because of that quote.

IMO it's important to invest in funds in which you know the manager will act decisively when he has a good idea, otherwise, what's the point?

IMO most managers have ideas but fear acting because if they turn out to be wrong, they lose business, and could get fired or have to close the fund. Therefore the prudent course of action is to follow the market, take only small chances, and end up with results that are quite similar to market, either under-performing or outperforming by a small amount.

Example of the thinking in most fund manager's minds; You can't pay your kids college tuition or your mortgage if you get fired. You can't find another job in the same field if you got fired for poor performance...

Now that the context is established, IMO the fund manager you want is the one that is smart and has the courage and conviction to act on his ideas, with said action being in proportion to the degree of conviction.

If you find those guys, you will benefit from their insight when they are right, and IMO you will probably, in the long run, benefit as they outperform the average, in the long run.
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Postby randomwalker » 26 Aug 2009 19:00

I've never been able to devine the truly skillful managers from the just plain lucky and have seen a few go from hero to zero in very short order. As I posted on another thread on this subject I was shocked to see the Sprott Canadian Equity fund lose half its value in less than four months between July and the end of October 2008 given Mr Sprott's reputation and the fact that this fund has the ability to sell short up to 20% of assets under management.
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Postby bones1 » 26 Aug 2009 19:00

Mike Schimek wrote:
because Sprott makes it clear that he can change the portfolio dramatically.


I'd feel comfortable investing some money with this guy because he knows his stuff, and because of that quote.

IMO it's important to invest in funds in which you know the manager will act decisively when he has a good idea, otherwise, what's the point?



I admire someone with convictions, and the willingness to take risks on that. But do it with their own money, not mine. I can lose half my money just fine on my own; I don't need to pay a money manager to do that for me.
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Postby scomac » 26 Aug 2009 19:28

ukridge wrote:scomac, comparisons to a 50-50 split of precious metals and small caps are not relevant, because Sprott makes it clear that he can change the portfolio dramatically. The above combination is where the money happened to be at the time of last report.


It is extremely relevant when you consider that according to the most recent disclosures from Sprott, those allocations are still accurate for the period that I compared performance. So what you are saying here is that they moved from one allocation to another and then back to the original allocation over a period of 7 months or so. Possible certainly, but that pretty much would confirm my suggestion of very poor timing and bring into question just how committed Sprott might be to his talking points.
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Postby ukridge » 26 Aug 2009 20:38

scomac:

So what you are saying here is that they moved from one allocation to another and then back to the original allocation over a period of 7 months or so


Eh? All I said was that I thought you formed your opinion based on short span of time.

bones1:

I admire someone with convictions, and the willingness to take risks on that. But do it with their own money, not mine. I can lose half my money just fine on my own; I don't need to pay a money manager to do that for me.


Once again, it's one year. If you judge a manager (or even an index) in a year, you only options are to stay out of the market, or go on your own.

Long term, Sprott has done no worse than most managers. He's doing exactly what the investors pay him for - *active* management.

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Postby scomac » 26 Aug 2009 21:37

ukridge wrote:scomac:

So what you are saying here is that they moved from one allocation to another and then back to the original allocation over a period of 7 months or so


Eh? All I said was that I thought you formed your opinion based on short span of time.


No you didn't. That said, you are right on the above point and because of that the figures may well be irrelevant...or maybe not. Still, I find it interesting and worthy of further investigation if I was a unit holder.
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Postby bones1 » 27 Aug 2009 08:04

ukridge wrote:bones1:

I admire someone with convictions, and the willingness to take risks on that. But do it with their own money, not mine. I can lose half my money just fine on my own; I don't need to pay a money manager to do that for me.


Once again, it's one year. If you judge a manager (or even an index) in a year, you only options are to stay out of the market, or go on your own.
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Yes, precisely. I'm better off going my own way, than paying Sprott to lose half my money. Or 70% of my money if I was dumb enough to buy into his public offering.

You keep tossing around his long-term performance as if it's more important than his short-term performance. It's not. Here's why:

Almost nobody buys a fund and then sits on it for 10 years, never adding to the holding, or selling any of it, or even not having to declare capital gains distributions. For those few people that got in with Sprott at the very beginning, put a lump sum into his fund, and sat on it in their RRSP (never adding to it) for 10 years, they did okay.

But most people do not do that, and thus never would see that long-term performance number you keep bragging about. People dollar-cost average, and thus have put in much more money towards the end of that 10 year period than they had at the start of it. When the fund loses 50%, their real long-term weighted performance is way worse than your stated number.

Or even worse, many people buy into the fund only after it has a "proven" track record. They'd buy at the high, and then promptly lose 50% of their money.

I suspect most people have lost money with Sprott, even people that have been with the fund for years.

Again, I state: I don't need to pay a fund manager to lose my money. I can do that for free on my own if I really want to. This isn't directed at Sprott, but the entire industry. Sprott is just an example of a sainted fund manager that proves he's all to fallible.
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Postby ukridge » 27 Aug 2009 09:11

For those few people that got in with Sprott at the very beginning, put a lump sum into his fund, and sat on it in their RRSP (never adding to it) for 10 years, they did okay.

But most people do not do that, and thus never would see that long-term performance number you keep bragging about. People dollar-cost average, and thus have put in much more money towards the end of that 10 year period than they had at the start of it. When the fund loses 50%, their real long-term weighted performance is way worse than your stated number.


They did badly only if they panic on a 50% loss and sell. To judge a manager, index or an asset class just after a disasterous year is just as bad as someone assuming 3 years ago that Sprott or Frank Mersch can "do" 20-25% returns per annum forever.

...you keep bragging about.


Off topic rant. Not sure why I'd brag about Sprott. He's not my child or anything. The thing about anonymous forums is that it's unclear if one should interpret such statements as a language issue, attitude or something else. <\rant>

Or even worse, many people buy into the fund only after it has a "proven" track record. They'd buy at the high, and then promptly lose 50% of their money.


If they bought one one lump after a number of hot years and sold after the first bad spell, they deserve to.

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<edited to fix a typo soon after posting>
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Postby bones1 » 27 Aug 2009 11:52

ukridge wrote:They did badly only if they panic on a 50% loss and sell. To judge a manager, index or an asset class just after a disasterous year is just as bad as someone assuming 3 years ago that Sprott or Frank Mersch can "do" 20-25% returns per annum forever.


Non-sequitur. You can't claim that Sprott's long-term "paper-gain" performance is 9%, but that his 50% short-term loss is only a paper loss and thus irrelevant.

Paper loss or real loss; it's the same thing. The investor's net assets have taken a dive. If I buy a stock and it takes a 50% hit but I hold onto it, I sure feel like I've lost 50%, and I have.


If they bought one one lump after a number of hot years and sold after the first bad spell, they deserve to.


I'm pretty sure Sprott doesn't give that consolation to investors.
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Postby George$ » 26 Sep 2009 17:58

The September report by Eric Sprott on the US dollar
Safe Harbour No More
and the concluding paragraph ...
We keep coming back to the numbers for the US debt, and they don’t add up. Even Alan Greenspan,
former Chairman of the Federal Reserve, believes that the rising budget deficits in the United States are
“unsustainable”. Because the US Government is printing dollars to fund their liabilities, it is highly unlikely
that we will ever see a failed bond auction similar to that of Poland. The far more likely outcome, therefore,
will be a US dollar crisis. It is for this reason that we have positioned our hedge funds and mutual funds so
heavily in precious metals. At the end of the day, when the world finally realizes what the US has done to
the world reserve currency, international investors will shift into an asset that no government can print. In
our opinion the US dollar’s status as a ‘port’ in the financial storm has officially come to an end.
“The search for truth is more precious than its possession.” Albert Einstein
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Postby ukridge » 27 Sep 2009 06:44

George$, interesting read indeed!

But this posting is going to work bones1 up to a frenzy! :)

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Postby bones1 » 27 Sep 2009 08:55

Frenzy? Why? Sprott may indeed by correct. The problem is that he's a broken record. All he ever says is "buy gold".

I do expect there will be some significant US inflation (though not the hyperinflation Sprott wants), and gold may not be a bad place to be. Personally, I'd rather be in TIPS if that happens. They're far less volatile than gold, and protect against inflation as well as pay interest.

If Sprott ever said anything other than "buy gold", I might take him a bit more seriously.

My issue with Sprott isn't what he says, it's a general issue against all fund managers: they're not worth the fees they charge. None of them are smarter than the market; some are simply lucky for awhile. "Hot" fund manager's luck eventually runs out. Sprott's luck ran out last year.
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Postby Wallace » 27 Sep 2009 12:28

Thanks for the link, George$

The US dollar (USD) is the world’s “reserve currency”. This status is arguably the greatest privilege enjoyed by the US as an economic entity. Most people don’t appreciate its significance. As the world’s reserve currency, the USD is used by other countries across the globe to back up their own respective paper currencies. In some cases, it’s as basic as a country stockpiling US dollars in their central bank vaults. When asked what supports their Pesos, Rubles, or Yen, the powers that be simply point to their pile of US dollars as proof of value. Upon reflection, it’s quite obvious how tenuous it is to back up one’s currency with a pile of paper issued by another country, but this is exactly how the world of international currency has worked for decades. And it has worked quite well…until now.


(my italics). It's only been a few short decades since paper money was released from its tether to gold. Compare this to thousands of years of experience with gold as the basis for currency. The above paragraph encapsulates very neatly the problem some people have with fiat currency. What's "holding it up" except a common mass conviction that paper money works? And is this conviction based on logic or is it based on previous conviction (past experience)?

from bones1
If Sprott ever said anything other than "buy gold", I might take him a bit more seriously.


The problem that underlies the slide of the USD and rise in POG is decades old and has still not been resolved. It's the buildup of crushing debt by successive US governments.
Solution 1 was Greenspan's decision to decrease interest rates to ease the repayment on international debt. The unintended result at home was an orgy of personal debt, mostly though tax-deductible mortgages, and internationally a move to hold less of the reserve currency. He exchanged one problem for another. When the housing and credit bubble burst they went on to
Solution 2. Pouring money into lost causes. Where to get it? Simply print it. As the article states, they abuse their priviliges as holders of reserve currency by doing so, just as they abused it by lowering interest rates. This isn't lost on the international community.

But the underlying problem is not solved. As the international community slowly divest themselves of the devalued dollars in their central bank vaults, more and more of these dollars find themselves back home, creating further devaluation. And still the US government continues to spend. When the music stops there will be no chairs (options) left.

I think Sprott will be consistent in saying "buy gold" until the USD has devalued itself to its lowest point, whenever that is, or until some US government brings its spending under control (not likely in the foreseeable future) or until the USD is once again tethered to gold (a serious suggestion on another link that I can't find at the moment.)

FWFrs seem to be split into two camps - those who accept that gold continues to be the currency of last resort and question the long-term validity of fiat currencies in the face of blatant political abuse, and those who feel that fiat currencies have already proved themselves and can work perfectly well without the backing of gold, officially or otherwise, if the international rules can be worked out.

One of these groups is deluded and belongs to the flat Earth Society. But which one? :shock:

Tune in to this column in ten years to find the answer. :wink:

<edit later>
PS. bones1, I agree with your general issue about all fund managers
</edit>
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Postby DanH » 27 Sep 2009 19:40

bones1 wrote:The problem is that he's a broken record. All he ever says is "buy gold".


I don't think that's a problem. I have a much bigger problem with managers that jump to a new theme every six to twelve months. That makes it harder to figure out whether their predictions have done well. With Sprott, he really latches onto longer term themes.

I have been critical of his funds but if you follow him, he has trumpeted a number of ways to play a broader theme. He's been talking about commodities (things you can touch and feel) for quite some time. But he switched from oil to moly to gold along the way as his commodity of choice. And if you go back far enough (before his funds were available to the public), you'll see he was quite bullish and invested substantially outside of commodity firms but was much more concentrated back then given his smaller asset base.

bones1 wrote:"Hot" fund manager's luck eventually runs out. Sprott's luck ran out last year.


Yes and no. True, his Canadian Equity fund and the other long only funds had a big hole blown through them last year and they haven't participated in the rebound thus far. But his hedge funds have fared pretty well. Lots of hedge funds blew up and folded last year. Sprott made money. His gain last year is made up of many calls, some of which lost lots and others that made bundles. But you have to give him credit.

Given the level of risk he takes in his portfolios through his various bets, I think you'd be hard pressed to say that his performance record is a fluke. The bigger question - which I asked in a report three years ago - is whether he's been running too much money to the point that it has affected the execution of his money management style. I think so and I warned that he'd get creamed holding a bunch of tiny companies if ever bids disappeared the way they did in 1998.

But 22% per year over a decade and 18% over the last dozen years, including the terrible 2008, is unlikely to be luck when small caps returned 7% and 5% per year respectively over the last ten and twelve years.
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Postby bones1 » 28 Sep 2009 07:29

DanH wrote:But 22% per year over a decade and 18% over the last dozen years, including the terrible 2008, is unlikely to be luck when small caps returned 7% and 5% per year respectively over the last ten and twelve years.


The problem with that logic, is that you look at one particular manager in isolation, and only look at the "lucky" manager. For every lucky Sprott, there are hundreds of unlucky others. And by simple random chance, you'll always find at least one lucky guy in a pool of hundreds (or thousands), even over a period of a decade or more.

Think of it as rolling ten thousand dice, each 5 times. There's a 72% chance that one of those dice will roll a "6" all five times. People will ignore all the other dice, because they were unsuccessful. However, they'll hail that one die as being a magical die because it rolls nothing but 6's! And they'll spread the word that they know of a die that is magical, and people will believe them because they'll only look at that one die.

I'm not saying that Sprott is completely random, but I'm saying your logic is flawed because you're ignoring all the other unsuccessful managers. You're looking at one manager picked out of thousands, simply because he was the one lucky manager. It's a skewed perspective.
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Postby DanH » 28 Sep 2009 09:44

bones1 wrote:Think of it as rolling ten thousand dice, each 5 times. There's a 72% chance that one of those dice will roll a "6" all five times. People will ignore all the other dice, because they were unsuccessful. However, they'll hail that one die as being a magical die because it rolls nothing but 6's! And they'll spread the word that they know of a die that is magical, and people will believe them because they'll only look at that one die.


Yes, I'm familiar with the logic. But it's important to look at exactly what I said first.

DanH wrote:Given the level of risk he takes in his portfolios through his various bets, I think you'd be hard pressed to say that his performance record is a fluke.

...

But 22% per year over a decade and 18% over the last dozen years, including the terrible 2008, is unlikely to be luck when small caps returned 7% and 5% per year respectively over the last ten and twelve years.


bones1 wrote:The problem with that logic, is that you look at one particular manager in isolation, and only look at the "lucky" manager. For every lucky Sprott, there are hundreds of unlucky others. And by simple random chance, you'll always find at least one lucky guy in a pool of hundreds (or thousands), even over a period of a decade or more.


How do you know what I am looking at? I isolated Sprott because, well, just check the name of this thread. If I see an index hugging manager outpacing the index, that's one thing. That is much tougher to distinguish from luck because such a manager will never be far from the index and it's part of the very philosophy and style used to manage the fund.

Sprott, a decade ago, had as few as a dozen or so stocks in his fund - holding as much as ~20% or so in one name (maker of Bow Flex exercise machine). He didn't get onto the short-tech-stocks-and-go-long-commodities bandwagon until the turn of the century. A bloated asset base requires a less concentrated portfolio but his bets remain large.

Again, if you're going to look at my research, let's put on the table that I warned against investing in this fund in a May 2007 research report. But I ackowledged that the guy appears to be very skilled. What those coin flipping examples DO NOT account for are managers that are not just flipping coins. Sprott is flipping them as high as the CN Tower and still catching most of them and getting them to turn up heads the vast majority of the time.

That's a very different exercise than your standard flip (i.e. index hugging).

bones1 wrote:I'm not saying that Sprott is completely random...


How can you use the coin flipping example (a classic example of randomness) yet turn around and say he's not completely random? What are you saying then about Sprott specifcially (not about all of those other managers)?

And I remind you that I'm hardly the president of the Sprott fan club.
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Postby bones1 » 28 Sep 2009 10:19

DanH wrote:
How do you know what I am looking at? I isolated Sprott because, well, just check the name of this thread.


Okay, fine. The OP isolated him. The point being, there's bound to be one manager that appears successful by sheer chance, and that one manager is the only one people will talk about.

If Sprott screws up for the next few years, nobody will ever remember him, and they'll all be hailing some other guy that had a run of luck.

How can you use the coin flipping example (a classic example of randomness) yet turn around and say he's not completely random? What are you saying then about Sprott specifcially (not about all of those other managers)?


I said he's not completely random, because comparing him to dice is obviously silly. It was an analogy I used to prove a point: in any large sample group you'll always get at least one good performer, due to "luck".

Sprott may be better than random. But is he good enough to warrant his management fees? Based on the last year, certainly not. And if you've just lost 50% of your money with Sprott, do you really care about the years before that? Nobody dumped a lump sum of cash into Sprott's fund 12 years ago and sat on it, so looking at long-term performance of a fund isn't indicative of how investors really performed.
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Postby George$ » 28 Sep 2009 12:27

bones1 wrote: ... Sprott may be better than random. But is he good enough to warrant his management fees? Based on the last year, certainly not. And if you've just lost 50% of your money with Sprott, do you really care about the years before that? Nobody dumped a lump sum of cash into Sprott's fund 12 years ago and sat on it, so looking at long-term performance of a fund isn't indicative of how investors really performed.

I agree that in the short term (say less than 20 years) it is very difficult to know if good returns are due to skill or luck - or vice versa if short term bad returns are due to bad luck (with skill) or simply bad skill.

That is why I always read and listen to what the person has to say before I decide if the individual is pumping financial pormography or the converse. That is the only criteria I have by which to decide that this person knows more than I do and that his/her views are based on evidence and thought.

That is why I pay a lot of attention to worthy folks like Warren Buffett, Jack Bogle, William Bernstein, David Swensen and others.

The Sprott fees are too high for me and so I don't have any money there - but I do find Sprott's arguments worth reading and thinking about.
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Postby scomac » 28 Sep 2009 12:41

George$ wrote:That is why I always read and listen to what the person has to say before I decide if the individual is pumping financial pormography or the converse. That is the only criteria I have by which to decide that this person knows more than I do and that his/her views are based on evidence and thought.


Agreed. By the time that you have statistical confidence in an individual's ability, they will be either dead or retired. It's much more important to weigh what they say than what they do. With this method, you should be able to weed out 90% of the posers.
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Postby bones1 » 28 Sep 2009 13:45

George$ wrote:The Sprott fees are too high for me and so I don't have any money there - but I do find Sprott's arguments worth reading and thinking about.


Yes, I think Sprott has some compelling ideas, and they're definitely worth thinking about. It's important to consider both the bull and bear case. I tend to be more of a bull, but that blows up in my face every 7-10 years or so.

Sprott tends to be out on the extreme end of things. This may be simply because it gains him media exposure. Remember he's selling his funds, and publicity is good for him. Always consider what someone's personal motives are when they say something. They may line up with what he actually says, but not always.
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Postby Mike Schimek » 28 Sep 2009 15:14

My issue with Sprott isn't what he says, it's a general issue against all fund managers: they're not worth the fees they charge. None of them are smarter than the market; some are simply lucky for awhile. "Hot" fund manager's luck eventually runs out. Sprott's luck ran out last year.


I'm curious about this part;

None of them are smarter than the market;


Why does it appear to be a foregone conclusion (to you) that no money manager can be better than the average in the long term?

I'm of the belief that performance and results in most fields; whether it be sports, career, business, etc., is directly proportional to the amount of time and effort put in, multiplied by "talent" (how well your body or brain is wired for the particular field).

Do you feel this is not applicable to money management, or that the theory of ((time+effort) * (talent)) is incorrect?
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Postby bones1 » 28 Sep 2009 15:55

Mike Schimek wrote:Why does it appear to be a foregone conclusion (to you) that no money manager can be better than the average in the long term?


Three reasons I can think of off the top of my head:

(1) Management fees. 'Nuff said.

(2) The method by which investors in the fund contribute money. Nobody buys a lump sum of the fund at its inception and then sits on it for 10 years. Investors either average-in, or more likely back-load into the fund as they acquire more financial resources to do so. Both of these situations will result in different real returns for the investor than what the fund actually returns over the long run (and usually lower).

(3) Taxes. Every time the fund sells stuff, you have to pay tax on that money, decreasing the real return.
bones1
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