Good Investing Can Be a Lonely Business: Ritholtz Chart

Barry Ritholtz is a Bloomberg View columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He blogs at the Big Picture and is the author of “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.”
Read More.
a | A

Here is a fascinating chart from David Merkel at Aleph Blog. The chart shows the sentiment cycle that arises due to performance chasing. That leads to crowded and, ultimately, unsuccessful trades.

As David observes:

When money is being thrown at a sub-asset class, like subprime RMBS in 2006-7, or manufactured housing ABS in 2000-1, the results are bad. The best results occur when few are lending, and only the best deals are getting done. But that means that few get those high returns. That is the nature of the markets.
The same applies to corporate bonds. It is wise to avoid the area of the market where issuance is well above average. When I was a corporate bond manager, I sold out my auto bonds, and my questionable telecom bonds, amidst much issuance. I had many brokers puzzle over why I would not buy their deals, even though they were cheap relative to their ratings.
The same applies to private equity. When a lot of money is being applied there, it is a time to avoid it. As it is now, private equity is throwing money at promising companies, many of which hold onto the money for safety purposes, because they don't have place to invest it. That doesn't sound promising for future returns.

Identifying new sectors to invest in is often lonely.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Barry L Ritholtz at britholtz3@bloomberg.net