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“Sharing a common outcome with large numbers of fellow citizens creates a mutually reinforcing social bond. Unfortunately, the comfortable rarely produces success.” – David F. Swenson
One of the hardest things to do as a professional investor is nothing at all. This became apparent to me during the years I worked on proprietary trading desks, where I was responsible for managing interest rate risk and making bets with the bank’s capital. To wake up in the morning, commute to work, arrive at our desk, and then do absolutely nothing but read and collect information is not as easy as it seems. Competitive pressure among peers, the constant barrage of incoming marketing calls from institutional salespeople, and the fear of missing out, all chip away at the necessary discipline needed to do the job properly. Many of us naturally equate action with productivity, but in the investing profession this is not true. Thinking back, I can remember times where it took every ounce of restraint I possessed, to walk away rather than pull the trigger on a trade.
Investing is unlike other professions. At times it can be quite lonely as we are expected to make unpopular decisions, which may or may not payoff. The best and most experienced among us are keenly aware of this fact and have grown to accept this. Nobody likes to lose, but everyone does to some extent. Successful investing occurs when financial objectives are achieved along side a comfortable level of risk. If the client is making money, but skittish out about excessive portfolio variability, it is only a matter of time before positions are liquidated at the worst moment. This is why in most cases, thoughtful asset allocation and diversification is a necessary ingredient to achieving one’s long-term goals.
For the vast majority of investors who employ an investment manager, to either advise or manage their separate account - less is more. Much of the work we do at Pacificus Capital Management regarding portfolio design is front-loaded. Determining client objectives, risk tolerance and an appropriate asset mix is at the heart of our process. All future work is dependent on getting these factors correct. From there it is about monitoring investments, revising forecasts, and making tactical allocation adjustments when warranted. Some investments work well out of the gate, while others can take months or even years to develop. What is important for the investor when analyzing performance is not the individual investments, but the portfolio as a whole, as each investment plays a different role related to the overall bigger picture. Simply put, just because an investment is down in value does not make that investment a bad one.
Drawing on what I have learned over the years, I generally caution investors about taking an active short- term role with regard to their portfolios’. I believe a high level of trading generally subtracts from the wealth of most individuals and institutions. This is because the hurdles to success are too high in a competitive and mostly efficient market. With regard to market timing, not only must the investor or manager know when to buy but he/she must also know when to sell. In addition, bid/offer spreads on securities explicitly subtract from total assets, as do commissions paid to transact with the brokerage firm. Also, don’t forget taxes, and the different treatment between short-term and long-term capital gains. At the end of the day, any tactical decisions must take into account the above hurdles and a question must be asked. Is it worth it? In many cases, it is better to sit on one’s hands.
Today I am sitting on my hands. It appears most markets are continuing to benefit from accommodative central bank policy and I do not see any reason for this to change in the near term. Jeremy Grantham, co- founder and chief investment strategist of the Boston asset management firm Grantham, Mayo, & van Otterloo (GMO) had this to say in their July 2016 newsletter “Immigration and Brexit,” which I generally agree with. “On the investment front the equation remains the same: pushing stock prices higher are the twin forces of the Fed’s policy and corporate buybacks. Trying to push prices down is an impressive array of everything else: disappointing productivity, growth, and profit margins together with all our domestic and international political uncertainties. And now Brexit! It is a testimonial to the strength of those two bullish forces that they can steady the US market near its high, regardless, apparently, of what is thrown at it. I therefore remain, on the basis of those two remarkable pillars of support, for at least one more quarter where I have been for the last two years; despite brutal and widespread asset overpricing, there are still no signs of an equity bubble about to break, indeed cash reserves and other signs of bearishness are weirdly high. In my opinion, the economy still has some spare capacity to grow moderately for a while. All the great market declines of modern times – 1972, 2000, and 2007 – that went down at least 50% were preceded by great optimism as well as high prices. We can have an ordinary bear market of 10% or 20% but a serious decline still seems unlikely in my opinion. Now if we could just have a breakout rally to over 2300 on the S&P 500 and a bit of towel throwing by the bears, things could change. (2300 is our statistical definition of a bubble threshold.) But for now I believe the best bet is still that the US market will hang in or better, at least through the election.”
Enjoy the rest of the summer. I for one have been trying my best to block out all the political bickering going on. Regardless if you commute to work listening to NPR radio or sit at home watching Fox News - the bias, dishonesty, and misinformation disseminated from our news organizations is almost as embarrassing as the candidates themselves. We must not allow the divisive rhetoric, which appeals to our emotions cloud our judgment. At the end of the day, I believe we all want many of the same things - security, prosperity and life enrichment. Neither Democrats nor Republicans own the truth. In today’s environment, it is worthwhile to point out that our similarities far outweigh our differences.
Justin Kobe, CFA Founder & Portfolio Manager
Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Cambridge and Pacificus Capital Management are not affiliated.Material discussed is meant for general illustration and/or informational purposes only, and it is not to be construed as investment, tax, or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice. These are the opinions of Justin Kobe and not necessarily those of Cambridge Investment Research, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing in the bond marketis subject to risks, including market, interest rate, issuer credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies is impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Diversification and asset allocation strategies do not assure profit or protect against loss.