Hero or Dog?
- Joshua M Brown
- November 28th, 2011
One of the most frustrating aspects of running other people's money in a tape this volatile is the Hero or Dog Syndrome that creeps in and infects the mind. "Will they love me or hate me today?"
It's a permanent feature of the investment management business but you could call the current environment the Super Bowl of Second Guessing. Anyone displaying an inordinate amount of confidence here is a psychopath, avoid having them watch your kids or borrow your car.
Holding 10 to 20 percent of assets in cash last week looked brilliant as stocks declined for five straight days with no hope in sight. That same 10 or 20 percent cash weighting will feel like an anchor today as S&P futures are galloping higher by 2% plus in the pre-market.
The S&P dropping 3% in a week leads to a "Why am I 80% in stocks?" phone call.
The S&P rallying 3% the following week leads to a "Why am I only 80% in stocks?" phone call.
And you have to take both of those calls.
And that's just in a week, imagine this seesaw playing out over the course of months.
But that's the gig. The willingness to underperform in a runaway tape is the job description unless you're running a buy-and-hold, long-only schmuckmobile mutual fund or something. If you have someone judging you on a 90 day trial basis right now (a bad idea in any enironment), you may as well return their money and say "no thank you."
Here's my friend the Interloper on the central conundrum of asset management:
Everybody wants the same thing in the end, high relative returns with a minimum number of sleepless nights. Human psychology being what it is, however, investors are often their own worst enemies in realizing their goals. Risk-averse investors, for instance, should want to underperform the benchmark in a bull market – it implies a strategy of risk management that will protect them when, inevitably, the benchmark heads lower. One of our favorite phrases was “no one’s managing risk in the index”. Of course the benchmark’s going to outperform in a sustained bull market. What happens in practice, investors getting frustrated by trailing the index for a couple of years, and then switching their money into more aggressive pools right before a downturn, goes a long way in explaining why most people lose money.
The goal for those of us in the trenches should be to avoid being the hero or the dog on any given day. Sounds easy but it's not. The goal should be to maximize upside capture (grabbing as much of the rally as possible) with less-than market risk if you're looking for any kind of career longevity in this business. The thing they didn't teach you about cowboys in school as that all the famous ones died in their twenties.
One key to this is managing expectations - both your own and the investors' in whatever your vehicle happens to be. Easier said than done. Nobody wants to hear about risk management in a melt-up but in a vortex of selling it suddenly becomes the hot topic of discussion. You can't afford to flit back and forth between fear and greed like the investors can - it's their money, they can act however they'd like to. You're not there to judge but you may want to regulate. If anything, you're there in part to help them put a stop to that emotional bullshit before they lose their minds and do the exact wrong thing at the exact wrong time.
Again, easier said than done; you have emotions too, after all. If you're going to do this for a living, get used to it.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.