Tuesday, March 31, 2009

Doug Kass: The Death of Buy and Hold?

Ironic timing since Doug Kass basically outlines in his article below exactly the strategy [Fund Performance Period 3] I've undertaken to adjust to this new day and age of "investing". As I wrote

While I've kept 35-45%ish of the portfolio in my core strategy, to take advantage of some of the hectic swings I've overlaid going short/long some of the levered ETFs with 5-10-15% of the portfolio relatively often. Some of the levered ETFs are held just for hours, some for a few days - but due to the construction of these ETFs they are horrible long term holdings, hence we cannot hold them for lengthier durations. But by doing this we can squeeze a bit more return out (if we are correct in the daily "mood swings") and compensate for keeping such a huge portion of the portfolio in cash.

But we're trying to adapt to the market we have, not what we wish for. I doubt we'll get the market we wish for anytime soon; but hope I am wrong.

And that does not even speak to the "Lost Decade" by American investors [Oct 7, 2008: 2000s Stock Market Worse than 1930s] and the "Lost Quarter Century" by Japanese investors. [Oct 27, 2008: Japan's Lost Quarter Century] I truly believe this "long only, cash is evil" mutual fund model which works great in primary bull markets needs to reinvent itself. While most blog readers are quite active investors, the typical person is passive - tossing their money into 401k plans, or IRAs dominated by two handfuls of mutual fund families, and simply must be throwing their hands in the air at what they received in return.

Doug calls this the instant gratification generation; I've called them the A.D.D. video game generation - same idea ;)

Article in blue shade below via TheStreet.com

If investors have cash on the sidelines, they should not wait too long to put it to use. There are good values out there in equities -- especially in financial stocks -- and you will be rewarded in the long run if you start dollar cost-averaging now.

-- Dr. Jeremy Siegel in an interview with TheStreet.com's Gregg Greenberg in August 2007

With all due respect to Dr. Jeremy Siegel (and though we are both out of Wharton!), I am now firmly in the camp that believes that the buy/hold strategy, which was almost universally accepted by the investment and academic community over the past several decades, is no longer the sole investment strategy to be employed in order to deliver superior investment returns.

A more balanced strategy might now be on the menu.

Glinda, the Good Witch of the North: Are you a good witch, or a bad witch?
Dorothy: I'm not a witch at all. I'm Dorothy Gale from Kansas.

-- The Wizard of Oz

In the main, long-term (i.e., buy-and-hold) investors view opportunistic traders/investors as second-class citizens, at best, and as an expletive, at worst. This comes despite some of the most successful hedge-hoggers (e.g., SAC's Stevie Cohen, Michael Steinhardt and George Soros) having made billions of dollars by way of commodity, stock and futures trades.

Recent academic studies, such as Dr. Lubos Pastor (University of Chicago) and Dr. Robert Stambaugh's (Wharton) "Are Stocks Really Less Volatile in the Long Run?" raise questions about the uncertainty of long-term stock market returns and how risky long-term investing might be in the future.

A more violent and uneven corporate profit outlook, higher futures-implied market volatility and the instantaneous dissemination of news are changing the investment landscape and portfolio strategies.

"Lions and tigers and bears! Oh, my!"

-- Dorothy, The Wizard of Oz

Market and economic conditions change, and the keys to prospering and delivering superior investment returns are, as always, based on the ability of a money manager to perceive transformative secular and cyclical developments in companies and industries as well as changes in the broader markets and economy.

More leverage equates to uneven profit growth and greater share price volatility. A more leveraged financial system, by definition, provides an increasingly volatile stream of corporate profits; it seems more likely that an era of higher implied market volatility is here to stay. It holds that change will be more rapid in the future than in the past and that those who adapt to that change most quickly will do better than those whose investment holding period is "forever" -- as Berkshire Hathaway's (BRK.A) Warren Buffett has learned from the flooded moats that he believed would protect the business franchises of depreciated stocks such as American Express (AXP), Wells Fargo (WFC) and U.S. Bancorp (USB).

An instantaneous dissemination of information spells trading opportunity. The delivery of news and information has also changed the market landscape. When I was a kid on Long Island, back when there was no business news on television, I purchased the New York Post's late edition to get stock prices. Today, Bloomberg, CNBC and Internet sites like this one provide instant information (news and stock prices) to market participants. In an instant-gratification world populated by more instant-gratification investors (both individual and institutional), a premium is put on quick reaction time. Not only are individual stock moves rapid as news is swiftly disseminated but so is industry share movement. Anticipating sector rotation has become a more important determinant of portfolio performance in recent years and will continue for some time to come.

Scarecrow: I haven't got a brain ... only straw.
Dorothy: How can you talk if you haven't got a brain?
Scarecrow: I don't know. But some people without brains do an awful lot of talking, don't they?
Dorothy: Yes, I guess you're right.

-- The Wizard of Oz

The depth of the market and economic slump in the past 12 months has undressed many money managers who, similar to the Wizard of Oz, have hidden behind the curtain of a buy-and-hold strategy as they have failed to recognize the swift impact on many of the company franchises they admired. In many cases, their analysis was wrong, circumstances changed too quickly for them to react, or they were paralyzed by inertia -- and they paid the price in large unrealized losses.

A buy-and-hold strategy may not be dead, but a thoughtful balance between long-term investing and gaming short- to intermediate-term trades is likely the recipe for investment success in the years ahead.

Investors, we are not in Kansas anymore.

[Mar 24, 2009: Doug Kass - Why the Bears are Wrong]

[Feb 28, 2009: Doug Kass - Kill the Quants, Punish the ProBears]

[Dec 29, 2008: Doug Kass' 20 Surprises for 2009]

[Dec 2, 2008: Doug Kass - Harder than the Average Bear]

[Sep 15, 2008: Doug Kass - Under-Regulated , Overcompensated]

[Sep 5, 2008: Doug Kass - Hedgies Get their Comeuppance]

[Jan 2, 2008: Doug Kass 20 Predictions for 2008]

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