 |
| Peter Hodson |
Prior to starting
5i Research Inc, I spent 28 years in the investment business. It was a crazy
ride -- I was a broker during the crash of '87 and a portfolio manager during
the dot-com boom and dot-com bust. I have seen market euphoria and market
despair. Sometimes it's hard to stomach, but it's never dull.
It is a stressful
business, but what helps one get through it are the learning opportunities. No
matter what is happening in the market, you can learn from it. For example, in
October, 1987, I likely learned more about human psychology, greed and fear
than I did in all of my psychology classes at university.
I also have had
the benefit of working with some extremely talented people in my career -- I
have learned lots from them. In my career I have also worked with some not-so-
talented people -- but you can still learn by watching others' mistakes and
trying not to make those same mistakes yourself.
But enough about
me. What I want to accomplish with this blog is to outline a few lessons I have
learned over the years. Hopefully, you will be able to utilize them in your own
investment dealings. Here goes:
- Have patience with your investments: Sometimes, investments don't work out as fast as you expect. It doesn't mean you are wrong, necessarily. You could be wrong, but you could also be just too early on an amazing investment idea. What you do with a temporarily underperforming investment is crucial: sell and get out; or double your position. Obviously each has dramatically different investment outcomes. The smart investors I have watched over the years have the conviction in their ideas to buy more.
- Admit when you are wrong: This lesson is a corollary to the above. As an investor -- professional or otherwise -- you will make mistakes. Smart managers have the ability to recognize when they are wrong. You may double your investment on strong conviction, but if you are wrong and have made a bad investment, it is time to change strategy, not double your investment again. Throwing good money after bad has ruined many an investment career. You can only catch a falling knife for so long- -eventually it is going to cut off your hand.
- Have humility: I have seen fund managers have a great winning streak, only to be shut down hard with a horrible year. Did they suddenly become stupid? Not likely, but they may have become complacent or arrogant in the belief of their investment prowess. Great fund managers always know that capital markets, fear, greed and psychology are always way more powerful than they are, whether they are managing $1-million or $10-billion-- the 'market' still has more and can trounce you in a second if you become a prima donna.
- Do your homework: Many fund managers take management or analysts' words at face value. Great managers, however, tend to be highly cynical -- they don't believe everything, or anything -- that they hear. These managers investigate companies themselves. One of the best sources of information is a company's competitors. They tend to really dish out the dirt on their competition and will tell you more about the company that you are investigating than you will ever get in a management presentation.
- Move quickly: This lesson, ironically, is almost the opposite of the one above. Markets move very quickly these days, and sometimes managers have to act on incomplete information. Invest -- then investigate -- is not what you would see in a fund management commercial, but it is often done by the better managers. Managers have to be able to quickly interpret small pieces of information and accordingly take a position in a company before the market moves too much. If the information or thesis can be confirmed, then you buy more after your initial position is already established.
- Be proactive, not reactive: I have seen managers change entire portfolios based on weekly oil inventory data. Long ago, I saw a manager sell a million shares of a company because of a negative media article. Remember if news on a stock has already made it into the mainstream media, it's likely the news is already priced into the stock. Rather than react, good fund managers try to anticipate what market reaction will be to a multitude of possible scenarios.
- Don't follow the herd: This is obvious, but you might be surprised at how many fund managers won't buy a stock unless it has analyst coverage, or won't consider any company below a certain size market capitalization. Good fund managers go beyond the comfort zone, however, and are willing to both do all of their own research and look for smaller companies that have the potential to become larger companies.
- Don't trade too much: Brokers aren't going to like me too much for this statement, but fund managers who trade too much are inherently disadvantaged, due to the bid-ask spread and commission costs. In my opinion, it is far better to spend your time researching companies rather than trading. The gain from a big stock rise in one of your larger positions is next to impossible to match by frenzied trading, even if it is successful trading.
- Be disciplined: Some fund managers forget this key point. One large mistake can ruin a manager's year. For institutional managers and retail investors alike, keep a diversified portfolio.
- Don't have a one stock, or one sector, portfolio. This is how to easily court trouble, be it from the dot-com over-concentration in tech stocks or last year's overconcentration in income trusts. There is nothing wrong in letting your winners run, provided your overall portfolio maintains some semblance of diversification. Don't be greedy. Don't gamble.
- Know your time frame: An investor with a one-year time frame should have a totally different portfolio from someone with a 10-year horizon. Good fund managers know what their investors are looking for and position their fund accordingly.
- Finally, good fund managers stay calm. The biggest fund manager mistakes are made when panic sets in, or managers get overwhelmed with extreme market volatility, external events or massive sector rotation. Take a deep breath, relax and plan. It is during these times of crisis when truly good fund managers shine.
Peter Hodson, editor
No comments:
Post a Comment