Saturday, November 28, 2009

When the Train Leaves the Station, You Have to Be on Board

I don't want to forget about this article from Clusterstock last week which quoted Raymond James' Strategist Jeff Saut.   Over the past several months, Saut has been repeatedly bullish.  What's interesting about Saut's view is that he hasn't been saying "buy stocks because they are cheap,"  he's been saying "buy stocks because everyone else is buying stocks."  In other words, "Don't fight the tape." (note: none of those are direct quotes).

This time, Saut elaborated on this phenomenon, explaining the concept of "career risk" for money managers:

"Nevertheless, we think the upside should continue to be driven by “game theory,” which suggests that the under-invested institutional portfolio managers have to buy stocks into year-end driven by their under-performance, their subsequent “bonus risk,” and ultimately their “job risk.”  Verily, many of the portfolio managers we know remain under extreme pressure to commit their outsized cash positions in an attempt to “catch up” to their benchmarks between now and year-end"

Saut's point is an essential one:  in the money management profession, for some accepted reason, it's one thing to lose 35% when the market is down 35% - you can write it off to a global clusterfuck - "hey - there was nothing I could do - did you SEE what happened to the S&P?!?!?"  But if the market rallies 65% and you're not on board because you're acting rationally and saying "nothing has changed, the banks are still insolvent, we haven't fixed the problem,"  well, you're clients will tear your head off.  Note - I'm in the latter camp here, trying to act prudent, and looking like a fool.  Thankfully, I don't have to answer to any investors - just myself, and I can justify my decisions to my own second guessing conscience, even if I'm missing the rally.  One thing this tells me is that I'm not a spectacular (and maybe not even a good) trader - a great trader has to be able to trade the market and make money even when it's not cooperating with his own thoughts about valuations.

This is related to my anecdote last week on Return Free Risk  - one explanation (although certainly not a valid one, in my opinion) for the behavior of merger arb fund managers who parked money in deals offering returns on par with riskless rates is that these fund managers are not paid to own treasury bills - they are paid to trade merger arb deals - so they buy the deals even if the risk/reward may not be adequately compensating them.



Anonymous said...


I'd comment that whilst Money Managers might have to deal with angry clients currently, they all have to stand on their 1, 3, 5, 10 year performance metrics.

Memories are short.


But What do I Know? said...

Are there outsized cash positions? I mean, did the money managers sit out a 60% rally and then wake up and say "OMG, it's the end of November! Only one more month in the year, and I've still got 50% of my fund in cash!" And if they're allowed to be down when the S&P is down, why would they sell to begin with--i.e., how would they have cash in a sizable amount at all? Mr. Saut is much more of an insider than I am, but come on--most stock fund managers only have sizable amounts of cash at the instant that someone gives it to them--and there hasn't been much money going into stock funds this year if you believe the ICI numbers.

This kind of theory of the stock market never made much sense to me. Doesn't mean the averages can't go up, but let's not confuse correlation and causation.

Kid Dynamite said...

@VLC - "Memories are short" sums it all up quite nicely

@ Butwhatdoiknow - not to mention that even if you did have an oversized cash position - investing it doesn't help you "Catch up to your benchmark" at all ! all it does is keep you from falling further behind...

GS751 said...

we only lost 20% when the market lost 35%..... WERE WINNERS!!! LOL

losing money is losing money end of story.