A good analyst and a better investor
learn from what they are exposed to in their life experiences. We are all
interested in picking winners and particularly in avoiding losers. In the US on
Thursday, we celebrated Thanksgiving. This official holiday is similar to other
harvest holidays celebrated in many countries that have developed from an
agrarian base. Within the US, the holiday is an occasion to watch traditional
American football games, either in person, on a television or on a computer
screen. Immediately after the holiday is the somewhat official beginning of
Christmas and Chanukah shopping season both in stores and Online.
As family and friends gather, often
there are opportunities to acknowledge what we are grateful for; forgiving
those that have disappointed us, but not forgetting the lessons learned.
Weather impacts
In New Jersey and some parts of New
York and other states, one of the things that we are thankful for is that we
have begun recovering from the recent visit of the super storm Sandy. Some of
us were just inconvenienced by the loss of power for a period of days into weeks.
Others have lost their homes in part or in total to the combinations of the
hurricane followed by a “nor’easter” snowstorm, and in some cases resultant
fires. The physical, emotional and financial damage is starting to be more
fully understood. Whatever the immediate size of the financial loss, by current
estimate the money spent on rebuilding, and in many cases new construction,
will be larger than the financial losses sustained. These expenditures on housing,
infrastructure and shoreline development will occur over a couple of years, as
much concerted planning is needed to avoid some of the ravages of future
storms. My guess is that the infrastructure and the rebuilding spending will
initially focus on an attempt to restore what was in the impacted area first.
There is likely a second phase that may occur as people start to take a long-term
view. Much of New York, Boston, Hong Kong, Singapore and elsewhere are built on reclaimed land from nearby oceans and rivers.
There are people who believe that within the next 100-300 years these lands
will be subject to waters rising five feet, which would flood LaGuardia Airport
in Queens and Logan Airport in Boston for example. If these fears are acted upon,
the indirect costs of Sandy will be huge.
The national media has heavily
focused on the impact of Sandy and has largely ignored the weather event that
will probably create a larger loss, the devastating drought that is affecting
all or parts of 17 Midwest and Western states. The drought is expected to
intensify through the winter. While the US is probably the most productive
country in the world, there is some possibility that we will have food
shortages and suffer some inflationary pressure, particularly intense on the
less well-off. A related issue to the food shortage potential is the actual
substantial curtailment of barge traffic along the Mississippi River. Due to
government water conservation policy, the Missouri River, which is fed in part
by dams, and in turn feeds the Mississippi, has not be receiving its full bountiful
supply of water since last week. The barges with their deep bottoms that won’t
be able to go downriver carry some $7 billion worth of commodities, coal and
other products, much of which feeds US export markets.
Two weekend analytical
observations
As long time readers of my posts know,
I usually comment upon my visits to a nearby high-end shopping mall during the
Thanksgiving weekend. This time I visited the shopping center twice; once on
so-called Black Friday and again on Sunday. In contrast to years ago, I was
able to find parking spaces. On Sunday I parked where we normally park during
the week, not a good sign for retail sales. One of the reasons that parking was
relatively easy was that there were fewer cars with New York license plates. In
the past, the difference between New York and New Jersey sales taxes drove New
Yorkers to shop for more expensive items into New Jersey. (A new very large
mall has recently opened that is much closer to New York City which could have
attracted the tax conscious shopper.) Walking in the mall was relatively
easy with very few crowded locations; the Apple store being one. Judging by
what people were carrying, there were more lookers than shoppers. Some high-end
stores changed their merchandise mix toward lower price point merchandise, one
being Tiffany. This tactic did not seem to attract many of the well-dressed
shoppers that had taken great pains to look attractive. The price and tax
conscious high-end shoppers were not enthused by what they were being offered.
The two walking tours however, don’t tell us how much shopping is being done
Online. I will watch whether the regular FedEx and UPS truck deliveries on our
block are delayed from their normal delivery times and if they seem to be
heavily laden. At this point, if I had to make a judgment, I'd say that this won’t be a great season for high-end
retail shops.
The second observation is that there
is much to learn from watching National Football League* games on
Thanksgiving Day. I have long stated that my two great learning experiences
were my active duty service in the US Marine Corps and my hours at various New
York race tracks, trying to wager successfully and avoid too many losses. The
study of past performance and other factors which I followed were called
handicapping, which focused on how changing conditions would affect the results
of future races. One of the techniques that I used in reviewing past
performance was to look for consistent, hopefully improving, patterns. Many
times these encouraging patterns were interrupted by inconsistent behavior. If
there were only one or very few inconsistent results, I followed the approach
of excluding the inconsistent results and believing that if the conditions were
similar to the races where the results were consistent, to believe that the
next race the horse was more likely than not to return to its trend of
consistent results. Long before the leading Football teams acknowledged that
they had hired statisticians as revealed in an article by Judy Battista in
Sunday’s New York Times, I was applying this technique while
enjoying watching various professional football games. On Thanksgiving Thursday,
there were two games where this kind of analysis was useful. In the first game,
a grudge match between the New York Jets and the New England Patriots, the
final score of 49 (New England) to 19 (Jets) was misleading in terms of
a comparison of the potential value of the teams in securing future victories. As
is often the case, God is in the details. In the first quarter neither team
scored. In the second half, the Jets scored 19 points vs. 14 for New England.
However, in the second quarter through a series of interceptions and fumbles,
New England scored 35 points, including three touchdowns in about one minute!
From my handicapping viewpoint, what happened to the Jets is the equivalent of
a jockey dropping his whip or a saddle slipping badly, which led me to exclude
the second quarter as indicative of future performance. Applying this approach
to selecting funds (and to some degree individual securities), I would be more
interested at the right price (odds) backing the Jets than the Patriots. When I
apply this to funds, I am willing to throw out the results of 2008,
particularly if by early 2010 the fund had recovered from its 2008 loss. Thus
one might say that I can be forgiving.
The second game put the Texans from
Houston against the Detroit Lions. Detroit traditionally has a game on
Thanksgiving Day, for in a much earlier time it could not get a local field to
play on for a normal weekend game after the holiday; so a tradition began with
the Lions playing this game on Thanksgiving. The Lions traditionally have a
poor Win-Loss record. This year’s game was against the Texans who had the best
record for the season in professional football of 9 wins and 1 loss. Remarkably
at the end of regulation period, the two teams were tied at 31 points apiece
and so they had to play in an overtime period. At our Thanksgiving dinner there
were relatives from Michigan. The Lady of the House, who had suffered through
many football games in Michigan, assured us who were watching the game that the
Lions would find some way to lose, which they did. She was not forgetting the
team’s past problems. In similar fashion, a fund or manager that consistently
disappoints is not likely to rise up for a sustained period.
* I have the honor and privilege to
work on the National Football League/Players Association defined contribution plans.
Applications for the care
and feeding of investment managers
As we are all humans, we should learn
to forgive them, as this is good for own mental health. Even the “programmers” that control the inputs
to quantitative funds are human, and therefore one should allow for some
mistakes. The key is the duration and explanation for the shortfalls from our
expectations. However, I firmly believe that performance results are not the
key to future results but rather a starting point to raise our understanding as
to the past, current and future conditions when a manager can produce
consistent results for a while.
Now it is your turn to
share:
What are you thankful for?
For what are you willing to forgive
investment professionals?
What should we forget?
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