Introduction
Why do very bright
people make wrong choices? In our highly professional world of investments why
do so many financially sophisticated investors choose the wrong investments at
the wrong time and in the wrong amount?
I believe that I should
always be learning. Because of my investment performance background I study
smart investors who regularly make mistakes. Hopefully, I will learn to my
clients and my own benefit. With the above mission in mind I was struck by an
article entitled “In Defense of Ignorance” which was published in the Marathon
Global Investment Review. Marathon Asset Management is a very thoughtful and
successful investment manager based in London. Apparently its skillset is to
focus on the supply side of economic equations and limit its input largely to
facts about supply. As this focused approach has worked for Marathon and its
clients, I considered this thinking in terms of my own intellectual process of
transitioning from security analyst through various stages to becoming an
entrepreneur and registered investment advisor.
Career Transition
Career Transition
As I was finishing my
active duty in the US Marine Corps, my plan of action to feed my young family
of three (and more planned) was to become a security analyst, study all there
was to know about a leading company in an important industry and be hired by a
company’s investor relations area as a person serving financial analysts. My
career goal then was to be a junior officer of a large, stable, and hopefully
growing company by retirement. Luckily for me it didn’t work out that way.
As an analyst my goal
was to gather more facts than anyone else on a targeted company. Interestingly
enough, the help of employers and analyst societies did not prepare me for the
real commercial world. I had to learn, usually by observing, how to sell
investment research, make sensible investment decisions, understand internal
politics, seek clients, and learn how to run a business. Thus, I had to move
away from the simple task of just gathering facts, as comfortable as that was,
to a broader set of skills.
Analyst
vs. Entrepreneur
Recently I have become
convinced that much of the thinking processes of investment, business, and
political leaders has evolved in a similar fashion. For a long time leadership
was assigned to those who gathered the most facts. Many of them were like a
good litigating attorney that gathers all the known facts about a case. He or
she does not want to be surprised by something said by a favorable or opposition
witness. After gathering the facts, attorneys are selective as to how they
build their persuasive pitches. These types of leaders, often rising through
highly structured organizations, are replaced or out-maneuvered by an executive
decision-maker.
The rise of the
executive decision-maker is changing our world as we know it. The old practice
of following a case study of known procedures is giving away to more free-form
decision-making. Increasingly, successful nations and business operators have
less in common with their perceived competitors.
It is not this blog’s mission to solve world and macro problems, but rather to focus on investments largely through investment managers and mutual funds. With that thought in mind I am wondering whether our practice of building diversified portfolios based on asset classes, size of companies, locations, and market capitalizations, which worked well in the past, is becoming outmoded. Should we assemble our managers and their funds as a good theatrical producer does with people of different talents? A good producer brings these multi-talented people together in a way that produces good results as a unit. As we move in that direction we will need a different classification system, which may be different for each client portfolio.
It is not this blog’s mission to solve world and macro problems, but rather to focus on investments largely through investment managers and mutual funds. With that thought in mind I am wondering whether our practice of building diversified portfolios based on asset classes, size of companies, locations, and market capitalizations, which worked well in the past, is becoming outmoded. Should we assemble our managers and their funds as a good theatrical producer does with people of different talents? A good producer brings these multi-talented people together in a way that produces good results as a unit. As we move in that direction we will need a different classification system, which may be different for each client portfolio.
The only time I had
some limited experience with this was when I was fencing in college. In a very
short time I had to make a guess whether my opponent favored offense or
defense, how to change the expected flow of events, how to lure an opponent
into changing styles, etc. We know that most managers are reactive to prices or
announcements, only some attempt to position prematurely. Others march to their
own drummer and stay fixed in their actions regardless of other stimulants. As
we have very intelligent readership of these blogs, I am wondering whether any
have some guidance for me as I struggle to adapt to my perceived view of the
new world of investing. Please contact me at AML@Lipperadvising.com.
For
the Fact Gatherers
Demand for money is
gradually rising. In the daily Wall
Street Journal there is a statistical box of ten “Consumer Rates and
Returns to Investors.” These indicators go from short-term to 30 year
mortgages. Each are shown at their current level and their range for the year.
Four of the ten are near their annual highs and none are more than 51 basis points
away from their annual high.
Two items:
When these two major market movers (along with most others) express their views, as a contrarian I get worried about a surprise that blindsides the majority of the thinking. I would be particularly worried if the stock market goes to another new high this year.
Two items:
- Merrill Lynch’s technical people view cyclicals as being more attractive than defensive stocks. They do not see a recession near term.
- PIMCO’s latest view is that the next economic recession is 3-5 years way.
When these two major market movers (along with most others) express their views, as a contrarian I get worried about a surprise that blindsides the majority of the thinking. I would be particularly worried if the stock market goes to another new high this year.
There is likely going
to be more excitement about the opening up of the Chinese “A” share market to
foreigners. WisdomTree* is warning that many stocks do
not have good characteristics as investments, so be careful.
*Personally
owned.
All too often
professionals utilize a formulaic process rather than adjusting to the changing
environment. This leads in many cases to
some bad choices.
__________
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Michael Lipper, CFA
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