The past three years have been grim for investors. There is not just emotional pain at seeing p...
The past three years have been grim for investors. There is not just emotional pain at seeing prices collapse but a lost sense of direction, footing and of how to conduct oneself in these turbulent times. Yet no-one questions how, as investors, we got into this position. After all, fund managers have much to bear in attribution and responsibility for the longest boom and probably most painful bear since 1929.
During the TMT bubble, investors were lured into making a quick buck and forgot about their investment principles. While they will have made money following this strategy pre-bear market, they will almost certainly have lost a lot more since that particular bubble burst, and in the three years since. It could be said that where we are today is 50% the fault of investors or fund managers.
nagement is certainly better than getting an 'interpretation' from brokers.
We see the likes of Eliot Spitzer chasing after the sell side analyst for 'misleading' investors. But the buy side has as much to blame in the whole situation too. Whether it is comfort in complex third-party models or insecurity, fund managers continued to listen wholeheartedly to brokers for advice. Not only is it inappropriate because investors are paying for our opinion, our work and our analysis; but also because there are clear conflicts in objective (one is commission and deal driven versus the other trying to invest) and investment horizon (fund managers trying to buy and hold and brokers wanting to transact).
Fundamentals can also get lost by constantly 'trading' to add value. Although nearly all fund managers say they are long-term investors, many are not in practice. Brokers, and sometimes fund managers, often say they can point out all the historical peaks and troughs of a market or stock and claim they can catch the high and lows to perfection. That is alluring but who can do it consistently? There is plenty of research showing high portfolio turnover results in high transaction costs. But it also results in portfolio managers losing sight of the long-term fundamentals of why they like a company.
There are also more controversial views of 'good investment techniques'. One is the issue of benchmarking or indexation. People in this camp often look at risk in terms of 'tracking error'. Their view to performance success is playing around that index. However, those who see benchmarking as 'rear view investing' think they are dangerously linking benchmark weight to 'buy-ability' of a stock. Benchmarking or index tracking tells you nothing about the quality of the companies, but merely their size. Simplistically, we see 'beta' as a result of techniques and not the other way round. As for 'alpha', it is all about getting the stock right. That means not just chasing growth but, more importantly, avoiding mistakes.
Financial markets, developed and emerging, will have their ups and downs. Faster information flows may allow quicker decision making but probably exarcebate the volatility, as human capacity to deal with the deluge of data has not really kept apace. Having a structure and process that appreciates both the strengths and weakness of human tendencies is obvious, but keeping discipline to it through a cycle is vital.
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