It's interesting that as of late I have been receiving phone calls and emails from clients who are questioning the recent run in the markets. It is the old "sky is falling" reverberation that one sees when markets trend a specific way. We keep hearing that we're in for a lot of short-term volatility so just picking good stocks is no longer enough, and that utilizing a bottom-up method of selecting quality companies will no longer work in this economic environment... I found this article from Tom Bradley at the Globe and Mail really hits the nail on the head when addressing this very question. Enjoy...
Tom Bradley -The Globe and Mail 09/09/2009
I feel like I'm really up to speed right now. With the lousy weather in Ontario and Manitoba cottage country, there's been more time for reading. And while I still can't tell you what “quantitative easing” is, I've firmed up my view on all kinds of other topics.
I'm convinced that to get out of this debt crisis, we have to come up with a strategy that doesn't involve people borrowing more money. China is not the star that everyone says it is – it's easy to look good when the government is spending like a drunken sailor and the credit tap is wide open. And perhaps our first step toward a greener economy should be the better use of all the natural gas we have.
I love thinking about the big-picture stuff as much as the next investment geek, but the problem is, I don't know how I'm going to make money from it. At the end of the day, I'm still a believer that the most reliable way to add value to an indexed portfolio is to work from the bottom up. In other words, build a concentrated portfolio that doesn't look like the index, one security at a time. Each time, attempt to buy something that is worth considerably more than it trades at in the market.
But I read something this week that threw me for a loop. In his latest musing, Ira Gluskin, the soon-to-retire but never retiring president of Gluskin Sheff, was outlining why his firm is putting an increased emphasis on asset mix and had added economist, strategist and industry rock star David Rosenberg to their team. Mr. Gluskin said: “There are the holdouts who claim that they just select the best stocks around the world, regardless of industry [or country]. They are true antiques.”
“ My first reaction to his statement was one of indignation. Hmmph.”
My first reaction to his statement was one of indignation. Hmmph. Mr. Gluskin goes over to the dark side and suddenly all his old philosophical buddies are misguided and out-of-date. Relics we are!
But after I got my fragile ego back in check, I thought I'd better give Mr. Gluskin's view careful consideration, because he is one of the leading thinkers and thought provokers on Bay Street, and was writing great stuff when Mr. Rosenberg was still in school. He is of the view that short-term volatility will be with us for a while and just picking good stocks is not enough. “We wanted better strategic advice on where events are heading.”
Let's take a step back. In reality, investing involves a combination of the “bottom up” and “top down” approaches. Even pure stock pickers have a general awareness of the overall business environment when they're doing their company research and valuation work. And after the macro investors choose their direction, they still have to select securities to execute their strategies (unless they're indexing).
Nevertheless, the approaches are profoundly different. The “high elevation” investors focus on economics and broad market factors, including valuation. Their big-picture conclusions determine which sectors and/or countries they will invest in. The security selection falls out of the macro work.
That's opposed to the managers skulking along the bottom (dare I say dinosaurs), who let their fundamental analysis and valuation work determine when to buy, hold or sell a stock. The country and industry weightings in their portfolios are the result of where they find the most undervalued stocks.
Too often other issues get mixed in with the top-versus-bottom discussion, specifically the merits of “buy and hold” strategies and the importance of asset mix. That's unfortunate. Equating bottom-up to “buy and hold” is just not appropriate. Certainly some stock pickers have low turnover, but others actively trade their portfolios. Top-downers vary greatly on this measure as well.
As for asset mix (stocks versus bonds versus cash), neither side will dispute that getting the strategic or long-term mix right is the most important thing an investor does. Where the big gulf between the enlightened and the prehistoric lies is in how actively that mix is managed, and how far they are willing to stray from the long-term targets to pursue shorter-term tactics. It's in most top-downers' DNA to be more active and make bigger bets, which prompts a number of questions. Is it possible, with the likes of Mr. Rosenberg, Jeff Rubin or Patti Croft at my side, to get it right consistently enough to add value? Does all that work lead to too much tinkering? Will it distract me from finding undervalued securities and prevent me from buying them? And can I use my budget for risk more effectively elsewhere in the portfolio?
I'll keep noodling on the issue since, in my experience, ignoring what Mr. Gluskin says is usually at one's peril. In the meantime, my fellow antiques and I will continue to make sure our clients' strategic asset mix fits with their objectives. We'll devote most of our resources to finding undervalued bonds and stocks. And we'll try to get the big picture by watching long-term term trends and ignoring anything to do with the next three months.
Cheers.
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