TAKING THE EMOTION OUT | CROUCH CONNECTION, AUGUST 2017
TAKING THE EMOTION OUT
This week’s Barron’s Magazine had two timely and insightful articles profiling portfolio managers who have been unusually successful over long periods of time. Although mutual funds are not my favorite vehicle for investing, I believe we can learn a lot from reading the anecdotes from these portfolio managers.
DO NOT INVEST EMOTIONALLY
Joel Tillinghast has been managing a well-known $40 billion fund since 1989. He is described as a deeply thoughtful man with a legendary work ethic, frequently in his office late at night and on Saturdays.
He says managing money is like planting a crop. “You plant a seed. It takes time to see results.” He says the role of an active manager is to “not invest emotionally.” Computers can evaluate many aspects of the stock selection, but it takes a human to evaluate the sustainability of the business model, the integrity and talent of the management team, or whether a company or industry is wildly cyclical or not…a very important factor.
He also says that a huge part of investing is knowing your limitations and learning from your mistakes. He says that after over 30 years, he is still learning from his mistakes and repeated that sticking to a “range of competency” is a big lesson learned. Another lesson learned is to watch out for obsolescence. He stresses looking for companies with “long runways” or sustainable competitive advantages which will last for many years…those will be the long-term winners.
He expresses some caution about the current market level, but he tells how he tried to develop a market-timing system early in his career, using his own money. It failed miserably, and he decided his time was better spent picking stocks. Since then, he has devoted his life to finding stocks with low price/earnings ratios, a history of cash flow generation, with “sustainable business models and a runway to grow.”
QUESTION CONVENTIONAL “WISDOM”
Another management team who’s track record has attracted attention is the duo Jenna Barnard and John Pattullo. They have worked together for the past 14 years, managing over $5.5 billion in fixed income assets
The London-based managers describe a lesson learned in 2010 and 2011, that taught them the value of questioning conventional wisdom. After the financial crisis, like many bond managers, they assumed that interest rates could only go up after decades of declining. It was “the biggest mistake of my career,” says Barnard, and a seminal moment for the pair.
After that, they say they turned a more skeptical eye toward what they had learned as students at some of the most prestigious schools in the world, and looked for alternative views. They were drawn to the views of Richard Koo at the Nomura Research Institute, who drew parallels between the stagnation Japan has experience over the past 30 years and the current slower growth of the U.S. and Europe. They now believe that slow growth will keep inflation -- and interest rates – relatively low for the foreseeable future.
What should we, as students of the market, take away from these biographical sketches? These are my thoughts:
Avoid emotional investment decisions. Emotional investment decisions almost always seem to be wrong. Focus on the tangible data and historical precedent instead of listening to the scare mongers on television. In other words, do your homework.
View the “conventional wisdom” with skepticism. Many times, what sounds logical is just not what a careful study of history would actually tell us. Believing the “interest rate increase” disciples has been a bad trade for almost ten years now.
Buffett’s teachings still have value. Tillinghast shares many of Warren Buffet’s views, particularly the one about focusing on good companies and ignoring the market. Over time, businesses with sustainable business models will almost always make good investments.
Having placed these portfolio managers on a pedestal, I must point out one more fact to complete the stories. Even though the track records of these individuals have been stellar over long periods of time, in recent years they have trailed their peers. In other words, even the brightest and best don’t outperform all the time!
SHOULD WE WORRY ABOUT NORTH KOREA?
Investors have been increasingly concerned about the war of words going on between our President and the young Dictator of North Korea. To make matter worse, the Dow Jones Industrial Average fell over 200 points this past Thursday when President Trump warned that the U.S. military was “locked and loaded” in the event of an unwise act by North Korea. Should we make any changes to our strategy?
Eddy Effelbein, editor of online publication Crossing Wall Street, made some sensible comments regarding the situation:
“Over the past several months, Wall Street has brought back its old habit of freaking out in the short-term over something that turned out to be nothing major. Remember the Brexit panic? The S&P 500 had its biggest daily drop in nearly a year. But shortly after that, cooler heads prevailed and doomsayers were yet again proven wrong.
Nearly the same thing happened after last year’s election. At one point on election night, the Dow futures were down more than 800 points. The end of the world never came, and the Dow is sitting on a nice 20% gain since the election.
My point isn’t to defend or criticize any of these political events. Rather, I’m encouraging you not be swept up by unreasonable fears. Stock prices are like a global blood-pressure machine. Historically, the U.S. stock market has been able to rally during highly-unsettling times for the country and the world. Any drop in U.S. equity prices is good for stock-pickers.”
Good advice I believe.
In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.
Again, we know the markets can test your patience sometimes and this may be one of those times. Please call or come to see us if you need a recap on our strategy or where we believe the market may be taking us. We always enjoy those visits.
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