Sunday, November 16, 2014

Music May Help in Diversifying Your Portfolio

I try to learn from everything that happens to me every day. Most of the time the learning comes from linking one occurrence to some on the surface, unrelated activity. I have been worrying about appropriate levels of diversification of fund portfolios that I manage. Three events that happened to me last Thursday afternoon and evening were:
1.  A non-profit investment committee meeting
2.  A wonderful private violin and piano concert
3.  Picking up the wrong black brief case
A non-profit investment committee meeting
To be asked to join this small group one needs a successful career of investing for others as well as for their own money. This group meets periodically to discuss the individual investments in the portfolio and to consider new investments. Members  are used to commanding their own organization as well as responding to demanding clients.  All including the chair (me), have strong opinions. What has evolved in summing up a point of view by an advocate or a doubter is that the investment future for a particular investment is focused on the answer to a single question. For example the critical question for gold is the current level of inflation. Similar questions and answers were brought out for each investment considered. The other people in the meeting most often did not accept the single question and related answer. Not surprising that no major decisions were made at Thursday’s meeting.

Private concert

Mr. Norton Hall was the host in his lovely home for a wonderful preview of a concert to be presented over the weekend at Bard College featuring the very talented Elizabeth Pitcairn on violin and the equally talented Cynthia Elise Tobey on piano. I expect that the concert will be well reviewed. They played four pieces including one specifically commissioned for the concert. I was seated next to a well-known Professor of Mathematics as well as a refined music lover. I asked him if could he estimate the number of notes that were played. Later after consulting with the violinist who is a music professor, he estimated that perhaps 75,000 notes were played on the violin and since the pianist was actively using both hands she probably played twice that number.

What struck me in comparing the investment committee meeting which lasted for more than an hour was that we intensely focused on under a dozen possible decisions as distinct from the very pleasant concert which was produced by approximately 200,000 notes or specific finger actions of the talented ladies. In the first case we were being directed to make decisions on a single focus whereas in the second we were being asked to enjoy all of the work. My ear is not sufficiently sophisticated to pick up a mistaken note as written or played. 

Getting back to my concern for the proper diversification balance, the thought occurred to me that for the owners of investment accounts the overall result was more important the individual component’s performance. One of the reasons that I enjoy the music of a large symphony orchestra is the blending of many different instruments’ sounds. I find this much more pleasing than listening for the same length of time to a single instrument, for example a tuba. With those thoughts in mind, I believe that many accounts would be better off with a full complement of instruments rather than an equally talented duet. Thus I believe, particularly now that we appear to be entering a period of increased volatility and excessive emotional trading,  many portfolios would be better off with an intelligently wide diversification of instruments. I have thus far been totally unsuccessful in convincing professional committees to begin to add some form of commodity investing, specifically because they have done so badly. As distinct from my learned professional investor friends I resist single question and answer approaches that are so common with sales people. This may be because I lack the willingness to put my faith and clients’ money on a single decision. Hopefully I can find clients who have similar views.

The black briefcase caper

Due to inclement weather, we were among the first to leave the Thursday night concert in Manhattan. By mistake I picked up what I thought was my briefcase and put it quickly in the backseat of our car. As we were in the middle of the Lincoln Tunnel leaving New York I received a call that I had mistakenly picked up the wrong black briefcase. Luckily for the distressed owner, one of my sons was able to return the prominent lawyer’s satchel and pick up mine.

There is an investment lesson from this mishap. To a hurried casual observer, two items or two funds that look to be identical can be quite different when one looks into their interior. This may be a particularly important lesson when comparing ETFs with actively managed funds; while the components might be the same, the result is different. For a musical example, we have experienced two different conductors playing the same piece of music at various times at the New Jersey Performing Arts Center and noticed one considerably more pleasing to hear.

Short bits

1.  Is there a message from the following year-to-date performances?
Apple* +42.5%, 
Microsoft +32.5%,
Berkshire Hathaway* “B” +22.7%,
Exxon -6.0%,
Vanguard S&P500 +16.2%,
 Vanguard Total Stock Market +15.0%.

2.  Moody’s stock* (as mentioned in last week’s post) gets a $100 handle.
* Securities owned personally or in our private financial services fund.

3.  Elliot Management among others, including ourselves, suggesting the inflation data that the central banks are using is “fake.” They and others are referring to high-end real estate prices in places like New York, London, Aspen and East Hampton. My concerns are about the collection procedures and calculations.

4.  In the last 41 years the low on the unemployment rate was 5.25% with the current rate 5.8% which leaves some room to become better, but it is also a possible sign that the cash on the sidelines needs to rush into the market.

5.  Writers and numbers types don’t agree. The Thomas Piketty book earning a best business book prize when at the same time former senator Phil Gramm and Michael Solon in the November 11th Wall Street Journal are the latest to address the author’s faulty analysis as being far too simplistic.

Bottom line

We have entered an important period of cross trends where trading abilities are likely to triumph for awhile over long-term investment skills. A well diversified portfolio can handle both. But the use of the four model Time-Span Portfolios (Operational, Replenishment, Endowment, and Legacy) should make it easier to meet the funding needs for each type of beneficiary.

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