Cody on RM: Break From The Herd

Administrator's Note: In his RealMoney Blog Cody rants on the money management business selling its soul:


By Cody Willard
RealMoney.com Contributor
06/22/2006 2:04 PM

Break From the Herd

Wall Street has always been a bunch of lemmings who copy whatever system has been working and attempt to further systemize it and then scale it for profit. And just like corporate group-think has all but ruined the music business, it is also a major threat to the markets and our economy. As the monies at stake have scaled to historic proportions, the growth of systemized money management has been exponential.

In particular, there are the fund-of-funds that have systemized the management of hundreds of billions of dollars. These systems lead these fund-of-funds managers to select only those money managers that will put money to work in accordance to the fund-of-funds expectations, and that leaves no room for free-thinking or flexibility, two traits I believe are valuable on Wall Street.

Running institutional money and want to change your approach because your analysis dictates such? Tough. Stick with the system that got you the money or the fund-of-funds will pull that money, regardless of your performance.

I've had systemic money in my fund before, and I kicked it out after they hounded me for being overly flexible. I'm serious. These system managers have no time and place for free-thinking and flexibility. In my approach to the market (and in my approach to life), I strive to be independent and free willed, and I have sacrificed size for flexibility.

Of course, the record-breaking decline in volatility over the past few years abetted the growth of many of these systems, and that cycle fed itself, delivering steady returns that appear to be "safe."

So what does Wall Street, in its endless greed and systemization of everything go and do? Rather than adjust, these managers try to juice those returns by levering up. And not just at the money manager level, but at the fund-of-funds level. So levered up money gets levered up, and the "safe systems" feed on themselves, further juicing those returns and "proving" the value of those systems.

In a similar vein, just this morning several new ETFs were launched that are double levered up, as Roger Nusbaum noted earlier. I often write about the virtues that the democratization of, well, everything, that the Internet and cheap computing brings about. But it's not all virtuous. These levered ETFs formally mark the introduction of levered systems to the masses.

Maybe this all works out smoothly and maybe even if it does get ugly it won't be for years to come. But music provides a case study here. Record labels spent millions convincing the public that the Simpson girls have a place in music. But they have since been reminded -- and harshly! -- that the public will only accept systemized groupthink until it doesn't. And then it gets ugly indeed. I worry that Wall Street's current trends, at the institutional and retail level, have our markets headed down this same path. As Dylan wrote: "Live by no man's code, And hold your judgment for yourself, Lest you wind up on this road."

I would love to get a dialogue about all of this going in our town hall of blog commentary. Are you running money? Are you part of the systemization of running money? Are you sure that is something that will pay off in the long run?