Tactical is Hard and Smart Doesn’t Mean Good
- Joshua M Brown
- August 1st, 2012
The Street circa 2012 is littered with the corpses of once-great careers and the egos of many a one-time guru.
I frequently point to these stories here not because I believe that I myself am infallible (my wife and friends can quote you chapter and verse the ways in which I am not). No, I share these stories because they are instructive for both investors and those of us toiling in the investment management business ourselves.
Here’s a gem that offers us two very important lessons for the price of one…
The AdvisorShares family of active exchange-traded funds recently announced it would be closing its DENT Tactical ETF (DENT). This ETF is based on the demographic research from bestselling author Harry Dent. According to the fund description, DENT seeks to achieve its investment objective by identifying broad trends in the U.S. and global economies and then implementing investment strategies in asset classes (such as, but not limited to, foreign and domestic equities or fixed income securities) that the portfolio manager believes will benefit from these trends.
The DENT ETF, however, was managed by HS Dent Investment Management, at least until the firm resigned on June 2. Since launching on Sept. 9, 2009, and through July 30 of this year, the fund lost 12.9 percent. By contrast, the Vanguard Total Stock Index Fund (VTI) gained 42.7 percent over that period, the Vanguard FTSE All World Ex US (VEU) gained 5.8 percent, and the Vanguard Total Bond (BND) gained 18.2 percent.
We learn two things here, things that should not ever be forgotten or shoved aside in the course of our investing careers:
1. Smart does not mean Good. Lots of people are smart but not all of them are good at managing money (recall the Nobel Prize-winning economists and mathematicians who built and blew up Long Term Capital in the late-1990′s). Not every stroke of brilliance equates to investment success. In the case of the very intelligent Harry Dent, he is particularly horrible at investing. You might recall his book about the Dow going to 36,000 published at the very peak (and end) of the 1982-2000 stock rally. Or maybe his follow-up book about the new crash/depression headed our way, published just about at the stock market’s recent “generational lows”. Then of course there’s the $2 billion mutual fund he blew up. And now there’s this DENT ETF thing he’s winding down. Hopefully he pursues his academic research as opposed to anything market-related for his next project.
2. Tactical asset management is hard. It is really hard. Every advisor in America is currently pitching themselves as “tactical” to their customers right now, or at least touting some sort of tactical strategy. This is because the market has been flat and the “growth” or “value” varieties of buy-n-hold are falling on deaf ears. This is understandable, everyone wants to make a sale. The thing is though, the majority of advisors and money managers are not equipped to do tactical correctly nor are they disciplined enough to stick to it during brief bouts of market euphoria. Many will dump their tactical holdings six months into the next market uptrend as the specter of index underperformance begins keeping them up at night. “Fuck this bond shit, I’m buying Apple,” will be the subconscious resolution – at precisely the wrong time for many.
So remember, smart people aren’t always good at this and being truly tactical means more than just using the word to describe yourself – it means actually being tactical. There are way too many products and people out there that do the former but not the latter these days.
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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.