THE BRUTAL, COLD AND HONEST TRUTH ABOUT “INVESTMENT THESIS”
In considering a topic to dissect for my viewing audience on this night, I couldn't quite put a finger on anything of relevance to discuss. Perhaps I have writers block? Perhaps it is a symptom of a schedule that has been busier than usual lately, with various projects I am working on causing my mind to race in a multitude of directions? Perhaps I am following my own advice, instinctively choosing not to think about this market more than I should?
Whatever the case may be, given my lack of performance in 2013 and the fact that the markets have become more difficult to predict due to the monotonous tone they have taken on, my tendency continues towards conservatism as opposed to anything overtly aggressive. I simply have no reason to come out swinging here. Whether from a technical perspective. Individual allocation perspective. Performance perspective. Everything is telling me to stay put. It can even be argued that my duty may fall towards cutting exposure.
I am bullish on every single stock held in the portfolios today. It is a matter of to what extent I am willing to sacrifice gains in order to allow the bullish thesis on these individual holdings to take shape. The more ingrained the faith that comes with extensive research into a portfolio holding, the more an investor is willing to sacrifice short, intermediate and long-term gains for the sake of allowing the thesis to take shape. Is this a proper form of portfolio management or an irresponsible, reckless act?
Much like any other aspect of this business, the line between proper and irresponsible is razor thin. Crossing that line is often indeterminable, only visible in hindsight much past the point of no return. What has occurred over the past decade is that the market has become extremely efficient in putting the will of an investor to the test through often brutal demonstrations of relentless punishment. There is no more "I will think about this for a few weeks or months and then decide what to do." If you are behind the curve ball when the market is throwing its pitch, your chances of catching up are virtually nonexistent.
The willingness to sacrifice gains for the sake of "the thesis" then must be looked at with increasing suspicion. The brutal, cold and honest truth is that these gains you are sacrificing as an investor simply have not come easily over the past 5 or 10 years. The cost of producing these gains with any consistency is extremely high in terms of willingness to maintain consistent exposure, constantly staring in the face of the next macro, debt-driven crisis.
Given the cost of production along with the efficiency of the opponent, you cannot depend on the thesis as you could once upon a time on Wall Street. Markets are more prone to overreaction, brutalizing those tender points that investors attempt to blanket under a facade of confidence. This new reality for Wall Street clearly explains the reason why a vast majority of hedge fund and mutual fund managers have been caught in a never-ending sea of underperformance for what has been an entire generation of investors.
The dependence on fundamental thesis to drive investment decisions with respect to allocation is the underpinning of modern day, traditional portfolio management. It is antiquated and unreliable due to its lack of consistency in being able to accurately assess risk within a portfolio. The investment professional or individual investor that doesn't adjust to this reality by creating a defined measure of performance based risk management will continue a trend towards underperformance.
My thoughts for tonight.
