Patience is priceless, but doesn’t pay
Patience, particularly in investing, is one of those virtues everyone praises but for which no one seems willing to pay.
An investment manager given money to manage is going to do the same thing with it pretty much every time: put the money to work.
This is true almost always and almost without reference to how attractive the alternatives are. Partly this is because the fund manager reasons that you would not have given him money if you wanted him to keep it sitting idle in a liquidity account, but also because most fund managers spend most of their time managing a specific kind of risk: career risk.
Even if they may be personally convinced that the markets they follow do not represent good value, the decision to stay in cash is personally risky for them. People don’t get fired for trailing the index by a point or two, but they do often if they miss a big rally.
That leaves most money managers with a perverse incentive; look like everyone else, take a few small bets away from the index you track and live to pay off your mortgage and fully fund your kids’ educations.
It is also, I would argue, psychologically hard for primates like us to refrain from activity; big cats do well out of waiting for their moment but monkeys usually make a living through ceaseless activity.
“Patience is also required when investors are faced with an unappealing opportunity set,” James Montier of fund manager GMO writes in a letter to clients that argues that no major asset class currently offers fair value, much less a margin of safety.
“Many investors seem to suffer from an “action bias” — a desire to do something. However, when there is nothing to do, the best plan is usually to do nothing. Stand at the plate and wait for the fat pitch.”
The baseball metaphor is apt; nothing gets less respect, historically, from the people who decide who gets to play baseball for a living than the walk. Batters who are willing to take pitches used to actually be thought of as lazy, even though recent statistical evidence indicates that the ability to get on base is highly correlated, amazingly enough, with scoring runs.
So it is with investors; deciding not to act, not to participate when value is not there is both freeing and likely to lead to better returns over the long haul. That said, there is absolutely no doubt that sitting out overvalued markets is a career killer for investment professionals and the kind of tactic best discussed with one’s spouse well in advance.
BILL GROSS’ BIG BET
This brings us to the astounding bet currently being made by bond king Bill Gross and PIMCO, whose flagship Total Return Fund, the world’s biggest bond fund, has dumped all U.S. government-related securities, including Treasuries and agency debt. Gross took cash to 23 percent of the fund, up from just 5 percent a month ago. In the Unconstrained Bond Fund, which is given more latitude, cash is an unbelievable 92 percent (CORRECTION: cash not pledged as collateral is 18 percent).
In part perhaps this reflects that Gross — rich, a brand unto himself and well along in years — is past the point of managing career risk.
It also, though, reflects the extraordinary state of markets today. Quantitative easing has effectively rigged the markets by buying up huge amounts of Treasuries. This has prompted a rally in riskier assets and raised legitimate questions over who will be there to buy U.S. government debt when the QE program comes to an end on June 30.
Gross argues that this will come as a shock to risk markets and Treasuries alike.
If it does and PIMCO keeps its portfolio looking like it does now, Gross will have quite a fat pitch to hit with his bundle of cash. If not, well then …
It all puts me in mind of Tony Dye, a legendary British fund manager who earned the nickname “Dr Doom” with his correct analysis of the stock market bubble that popped in 2000.
Dye, who was the dominant manager in a highly concentrated pension fund industry, was so convinced of the bubble that at one point he took his main fund to a zero weighting in U.S. stocks. Hilariously, Dye’s funds were so large that they distorted the index used to judge fund manager performance and many of his less convinced peers duly turned bearish too, managing their own careers.
Dye, I hate to tell you, was bearish right until he was forced into early retirement in March of 2000, less than a month from the top of the market.
(CORRECTION: Replaces “… which is given more latitude, cash is an unbelievable 92 percent” with “cash not pledged as collateral is 18 percent” to reflect that the original higher figure included cash being used as collateral and was therefore not an accurate gauge of risk appetite)
(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. Email: firstname.lastname@example.org)