Sunday, November 13, 2011

Patience Can Be Expensive To Your Portfolio

In a recent blog post, I made the statement that patience can be expensive. This thought became clearer to me after reading a number of third quarter reports that were, in effect, apologies for performing so badly. In essence, the apologists were intoning the message that fund managers buy securities well below their estimated intrinsic value. These so-called “bargain purchases” did not hold up very well in the dramatic decline in the third quarter. They were praying that their investors be patient and it will turn out alright in the end.

Premature purchases

Over the last couple of months, members of this blog community have received my views that we should be investing in Asian equities. Since these calls for action were prior to the very recent bottoms, by necessity I practiced some patience before the recent upturn. This last volatile week I was early once again, purchasing some shares in UK money managers and brokers. Luckily for me, I had only to wait until the end of the week to see positive, albeit slight, gains. I did not have to exercise patience for long. The point here is that it may be okay to be a little premature.

Long suffering patience

In contrast to my brief pain for being premature, one needs to look at the funds that are pleading for investors to be patient. In some cases they have underperformed their own identified targets 1,3,5, and 10 years. The insistence that their performance numbers will come out ahead is based on the fact that over the time since inception, these multi-billion dollar portfolios have very attractive results.

When should impatience take over?

In discussing this briefly with my sage wife Ruth, she warns that impatience can be worse than too much patience. This is all too true; for example if we had dumped our clients’ Asian fund holdings in September, or my personal UK asset management stocks early in the week. What could have compounded either error would have been not investing at all or investing in the wrong vehicles.

If you take the attitude that each day you repurchase your holdings, you should examine the research case for buying your positions today. As we live in a very dynamic world, I am getting increasingly impatient with the same rationale for buying into similar names today as what I heard 1, 3, 5, and 10 years ago. The absence of new fundamental, analytical support other than “price has made something cheaper,” is not reassuring. Some of the relatively poorer performance players have recognized these concerns; they have detailed a portion of their staff to produce the "Bear case" for their holdings. In a number of cases, the more traditional managers are attempting to learn from long-short hedge funds. Another approach is to rotate the analytical coverage of the names in the portfolios. I have yet to see much relative improvement in funds applying these techniques. (I could be too impatient.) Those analysts and portfolio managers trying the new approaches may be too junior in their organizations to have their opinions lead to prompt action.

Trading Markets vs. trading “The Market”

Most long-term investors desire to have quasi permanent holdings of securities or at least similar investment objectives. These people may very well feel that for the past ten years we have been in an essentially flat market as measured by the securities indices, therefore they have been right not to make changes, as “the market” has not spoken with clarity and force. They are going to wait patiently until it does.

At the race track, one of my two learning institutions, horses who come from behind do occasionally win, if they can get to the lead by the known finish line. With our race for acceptable returns, we don’t know where the finish line is. Yes, we do know what various “gate keepers” and fiduciaries want to see in their periodic reports. However, we don’t know when that all important breakout or breakdown reporting will be. That is the time when patience will run out and results without excuses will determine whether the institutional relationship will continue.

Multi fund managers and accounts

For those of us who have the fiduciary responsibility for these accounts, we need to deliver acceptable performance. In the best cases, we need some demonstrable winners and only a relatively few managers that try our patience. Bearing in mind Ruth’s warnings on the natural impatience of those in the market, we should periodically prune those formerly good-to-great funds that beg for our patience. We can hold a few of these if they can supply current reasons to believe that their holdings will work, but each year we should eliminate or rotate out those that do not.

What do you think?
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