I’ve had this postcard sitting around for many years.  The description:  “Wall Street, New York City, 1988.”


It doesn’t look like that any more.  I recall being on the floor when an important piece of corporate news broke and the post where the stock was traded was like a human magnet.  Those days are gone.

But we are no less frenzied.  Of course, the machines are now going faster than we ever could — but we rush around trying to keep up with the cascading waves of information that bombard us.

For me, it’s time to take a small step back to work on some new ideas.  Therefore, like its sister blog, research puzzle pix, this one will go on hiatus for now.

In the meantime, postings will continue on the flagship site, the research puzzle, and The Prudent Fiduciary Digest newsletters (designed for institutional asset owners but available to all) will be published every few weeks (and don’t forget Letters to a Young Analyst).  If you’d like updates on my new work-in-progress project, sign up here.

The postcard above is symbolic, in that I have described this site as “a scrapbook.”  I appreciate you paging through it.

golf in the investment kingdom

It’s U.S. Open week, so I thought I’d link to some of my postings that reference the game of golf.

I used to be quite involved with the game, including being behind the scenes at some major championship events.  In fact, when Phil Mickelson’s name came up in regards to an insider trading investigation, I couldn’t help but remember the last time I saw him.  He was on the deck of the media tent at the PGA Championship with several reporters, giving them tips — not stock tips, but his opinion on the Vegas line on some sporting events. 

The postings:

What do you do when you’re out of position (7/16/08)?  For investors, as for golfers, “It’s never too late for a good shot, whatever has transpired.”

A set of three postings revolved around the before, during, and after of the 2009 PGA Championship, specifically Tiger Woods’ attempt to win his fifteenth major and the events that followed.  (He blew a lead and hasn’t won a major since.)

Remember the great Accenture campaign about choices and possibilities that featured Woods?  The competitive keys (8/10/09) at the heart of it apply to the investment process too.  Speaking of which, we often put our faith in a number (8/20/09) and what we think it represents, only to be surprised.  Subsequent off-the-course events for Tiger showed the dangers when organizations are stuck in one dimension (1/27/10), which happens when you rely on a star system, in the investment business and elsewhere.

The golf industry has been in decline for several years, which made me think about another time on the links (7/18/12) with fellow portfolio managers at a two-day broker event at the legendary National Golf Links of America.  The chart of Calloway Golf shows one aspect of the tough golf market over the years; the story says something about falling in love with the stocks we know.

The stunning come-from-behind upset victory by the European team in the 2012 Ryder Cup Matches show that how does matter (10/1/12).  “The parallels with investing are obvious.”

the value of cluelessness

Sahar Hashemi recently posted an article on LinkedIn titled, “Act like a ‘Big Kid’: The Importance of Being Clueless.”  In it she contrasts tackling a business idea as an outsider (“absorbing every little detail, learning with the curiosity of children and without any presuppositions”) with maintaining it as an insider (focused on “systems, processes, products, sales” — and the status quo).

She wrote:

"As we accumulate experience and knowledge, our thoughts get shackled to an extent.  We get used to failures and imperfections, and become numb to the possibilities of anything new.  We repeat ourselves.  We don’t see the really annoying things around us — the gaps and headaches begging to be solved.  We lose our curiosity."

Hashemi believes that organizations need “to avoid the trap of expertise and un-learn slightly,” to give “people permission to look around with fresh eyes like those of a novice, rather than the jaded perspective of the expert.”

The article resonated with me because, as a consultant and writer I often wear the label of “expert,” but my real advantage comes from blending that expertise with a dose of cluelessness.  As an outsider, I’m able to more easily see gaps that exist and to propose creative solutions apart from the existing norms.

In investment organizations — like other organizations — fresh eyes are hard to find.  And as much as I would like it to be the case, just hiring a consultant once won’t provide the differential perspectives that are needed on an ongoing basis.  For leaders, it is important to build a team not just made up of experts, but of those that “apply themselves with curiosity and a freshness to everything around them.”

never satisfied

In March I wrote about the different approaches to fixed income investing these days, with some investors focused on de-risking and others hell-bent on chasing return.

That posting was triggered by a sponsored section in Pensions & Investments.  This one is too.  It features Manulife Asset Management’s Strategic Fixed Income Strategy.  Here’s one of the graphics that accompanied the Q&A with the portfolio manager, which was titled, “Never Satisfied.”

Note the incredible compositional changes that have occurred over time.  Now there are no U.S. Treasuries in the portfolio (those perform very well in depressions, recessions, and crises).  Corporate bonds have increased significantly — a big load of them being junk bonds.  Plus, a variety of other yield-seeking vehicles have been added of late.

P&I's sister publication, InvestmentNews, had a headline this week, “Stocks creep into bond funds.”  There’s no evidence of that here, but it’s part of the same pattern, with go-anywhere bond funds truly going anywhere.  They are apparently never satisfied.

If that’s what an investor is looking for, so be it, and I have no reason to believe that Manulife’s strategy isn’t among the best around.  But seeking returns at any cost means that it is ill-suited for the “fixed income” buckets of many investors.  

Perhaps the portfolio managers will display great prescience in identifying dangerous environments.  If not, risks will be revealed that many of the asset owners have forgotten about.

Tags: fixed income

easy call

On Friday, I wrote a summary of the recent 22-page GMO quarterly letter, in which I tried to condense the salient points and provide some commentary.

The letter was actually three in one, with separate sections by different authors.  Jeremy Grantham was up first, as you would expect given that he’s the leader of the firm and a well-known market sage (whom I admire).  However — and unfortunately — he put on his fortune teller’s hat, as I described in my piece:

"In the end, he pronounces that the market will go still higher and even throws out a number (2,250 on the S&P 500) to strengthen the interpretive frame.

"It is the least enlightening section of the letter.  Grantham reminded me of the prognosticator who feels the need to ‘call’ the market, ‘It’s going to do this, then this, then that.’  It’s exactly the wrong kind of guidance for most decision makers, even if his instincts turn out to be amazingly accurate.  The bottom line for many will be, ‘Grantham sees more room to run,’ tempting them to continue full speed ahead despite the risks of doing so."

It was an easy call to speculate on where all of the emphasis would be, in the financial press (some examples below from the largest media outlets), in the blogosphere, on Twitter, and in every other corner of the investing world.

22 pages of good material, condensed into a destructive focus on levels and timing and punditry instead of perspective and risk management.  We get the industry we deserve.

pinpointing the advisory approach

The financial advisory world, that formerly sleepy area of the investment business, has been the hottest thing going for a number of years.  It is an amalgamation of different kinds of organizations.

There are advisory firms of all stripes and sizes, from behemoths to one-person outfits.  There are brokers on commission operating under a suitability standard and registered investment advisors working within a fiduciary standard.  Some have roots in financial planning, some accounting, some insurance, and some investments.  There are a multitude of business models and investment philosophies, proceeding under a variety of banners (think “wealth management” for a particularly popular one).

A recent posting by Michael Kitces asks a question of all, “What’s Your Investment Management Style?”  It starts with an interesting observation, that the Markowitz-triggered mean-variance optimizations that advisors use to come up with asset allocations might not fit that well with Markowitz’s original intentions.  (Sound familiar?  The same thing happened with the Sharpe ratio.)

The main thrust of the piece is the examination of a simple two-by-two matrix, with active and passive divisions for each “investment selection style” and “asset allocation style.”  The four resulting categories go a long way toward describing the most common approaches by advisory firms.

As such, it provides an easy guide to one aspect of the foundational activity of formulating investment beliefs.  As in other parts of the investment ecosystem, deciding on those beliefs at an advisory firm is a critical first step.  Then there is the challenge of communicating them, internally and externally, and actually living them, especially when crunch time comes.

Given the range of approaches today, clients can end up with any of the four chief styles (or the flavor of the month if their advisor lacks a consistent approach).  Kitces urges advisors to identify where they can add value and make choices accordingly.  (I would amend that to include “after their own fees are included,” since the pricing by some easily outpaces the value that is added.)

For those selecting an advisor or evaluating an advisory organization, having them pinpoint where they are on the grid may be a very good place to start.

catalyst investing

I’ve been going through materials from the late 1990s and early 2000s, remainders from a truly amazing time that I was going to write about in some depth but never did.  The number of extraordinary stories was mind-boggling.

Among the papers was a Wall Street Journal article from December 3, 1999:  “Day Trader Profits For Over 20 Years.”  That trader was Steven Cohen, by then seven years into his run at SAC Capital.  The outlines of the story are there:  Bigger-than-big fees, huge trading volumes, and “an enviable information network.”

Cohen was quoted as saying, “It’s not growth investing.  It’s not value investing.  It’s short-term catalyst investing.”

The story, by Mitchell Pacelle and Charles Gasparino, includes this:  “Mr. Cohen doesn’t trade blind.  Rather, he makes educated guesses about when stocks will move, or stop moving.”  As his firm’s success led to more assets under management, Cohen also sought to school the other traders at the firm in “the SAC way.”

Like a lot of things from the period, that way — that edge — looks different in hindsight than it did at the time.  However, the dot-coms started blowing up within weeks of that story, the mega-caps were soon deflating, and revelations of shoddy accounting and analysis ultimately ruined the reputations of captains of industry and kings of the Street.

But it took a good long while for “catalyst investing” to come under fire.  When it did, some of the foot soldiers came to grief, but the general lived on to trade another day.

Tags: hedge funds

managed solutions

The 28-page (in large format) “special advertising supplement" in a recent InvestmentNews was titled, “Managed Solutions: Meeting Today’s Challenges.”  It was sponsored by the Money Management Institute, which bills itself as “the leading voice for the global financial services organizations that provide advice and professionally-managed investment solutions to individual and institutional investors.”

Given the publication that the supplement appeared in, it was targeted not at investors of either stripe, but at financial advisors, who are the intermediaries through whom the services are offered. 

So, you might say, what are “managed solutions”?  According to the supplement, they share the attributes of fee-based pricing, a client assessment process, a “single proposal system,” research on available investments, consolidated performance reporting, and rebalancing, tax management, and customization.

Some of the products put under the umbrella include separately managed accounts, “rep as portfolio manager” offerings, mutual fund advisory, unified managed accounts, “rep as advisor” solutions, ETF managed portfolios, model portfolio programs, and unified managed household structures.

The question becomes, “What is right for the client?”  Is there unnecessary complexity in these solutions?  Who is doing the “management”?  (In some cases, it comes from advisors with little time to devote to investment research and analysis.)  And, what are the fees?

The last question is an important one.  Adding up an advisor’s fees and the fees for the providers that are used, you can get to some pretty big numbers.  “Managed solutions” can turn out to be “expensive solutions” without commensurate benefits.  That should be a bigger deal for the industry than it seems to be.