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The Wile E Coyote Theory Disproven Preemptively

Published on March 28, 2008 by in Research

Upon watching Wile E Coyote and his efforts to catch, kill, skin and eat the Road Runner you may have noticed a recurring theme — Wile was always very very close but never quite caught the Road Runner. While we admire his sticktuitiveness (not a word), we scorn his lack of ever trying the same thing twice. We notice the same flaw in Cobra Commander (CEO of Cobra Inc) and also in Megatron (Chairman of the Board for the Decepticon Group). They all shared the flaw of spending a lot on R&D only to give up upon the first failure of their generally well thought out plans and technology. We always wonder what would have happened if only Wile E Coyote had tried one of these traps/plans more than once — surely the Road Runner couldn’t make the same improbable miraculous elusion TWICE. It’s just not statistically likely that a once in a millennium type of event would happen again. So you should always try a failed genius plan at least one more time per the Wile E Coyote Theory of Management. Well, now we know (and knowing is half the battle).

Now, Mr. Meriwether’s biggest fund, a bond portfolio, has plunged 28% this year….

Mr. Meriwether’s recent troubles partly stem from borrowing. His bond fund had $14.90 in borrowed money for every $1 in equity at the end of February, according to the March 18 letter.

Mr. Meriwether marketed his bond fund as a lower-risk version of LTCM’s core strategy, of identifying the next financial crisis and profiting from it by buying securities its managers consider underpriced. Investors were told that the firm would aim to keep borrowings below 15-to-1 even during less-volatile times.

JWM’s Relative Value bond fund, launched in December 1999, has lost 28% this year through last week after notching a 5.6% return in 2007, according to people familiar with the fund. The recent losses further weigh on the fund’s average annualized return since inception of about 7% through February 2008. The Lehman Brothers U.S. Aggregate Index, a measure of investment-grade bond performance, has returned an annualized 6.5% during that period.

Recommendation: Leverage kills. Short funds that are dependent largely on leverage to generate even sub-adequate returns, especially ones that were amazingly collecting 2 and 20 for it and ones run by people associated with the worst hedge fund blow-up ever, having had their hubris chronicled in a popular book. We recommend that Meriwether be permanently elevated to the role of Chief Investment Coyote and only be allowed to manage the Acme Family of Funds.

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