Friday, April 19, 2019

How to Be a Really Bad Portfolio Manager

Intuitively, most people would think that portfolio management should be more science than art right? After all, the two words: portfolio and management just sound so scientific! In reality, portfolio management is probably more art than science. Yet most professional fund houses like to approach portfolio management scientifically. Hence the no.s speak for themselves. 80% of all portfolio managers cannot beat an index like the Straits Times Index, or the Dow Jones.

Good portfolio managers* are a unique breed. Especially those who had been humbled by the markets time and again. They spent their entire careers learning about markets, trying to beat the index only knowing that they somewhat succeeded because they never let cocksureness get into their heads. Their faces seem to show their market war stories and they never truly smile. The pic below shows Stan Druckenmiller, #2 for George Soros and probably one of the best portfolio managers of our time. He never had a down year for 30 years and compounded returns north of 25%pa. His recent interview with Kiril Sokoloff is a must-see for every reader here.

Stan Druckenmiller

Portfolio managers are artists, but also much more. They tend to possess the ability to synthesize a lot of information and come up with a Big Picture of the investing world. But this Big Picture in their mind is never completed. It is constantly adjusted to better reflect newly discovered truths and bets are taken to express views to make money when these truths are found out later by the markets. This requires rigor. It's backbreaking hard work. Portfolio managers do mental aerobics ten hours a day and then sleep and dream about markets. When they wake up, they eat and breathe stocks, bonds, rates. 

So, how to be bad at all this? Just slack. Relax in your comfort zone and focus on your own little bubble. Come up with your Small Picture of your world and think you will always be right. Then go watch Netflix and spend time mindlessly. Eat, sleep and breathe Korean drama. That's the first step. That's also perhaps the only step most professional fund managers take. To most, portfolio management is a job, not a passion. When it's not a passion, it's difficult to be engaged all the time. That's why most fail. They were just not passionate nor rigorous enough.

But it takes more than passion and rigor while seeing the Big Picture. The last trait of strong managers is the flexibility of their minds. They are never stubborn. During the abovementioned interview, Stan Druckenmiller, the best portfolio manager of our time, just kept admitting his mistakes. He also shared how he always tried to reconfirm his views and if they are off, readjust the way he invests to continuously make money. After 30 years, he saw it time to call it quits as algo trading disrupted the way he used market signals to make money. He decided it's time to move on.

This is flexibility. 

Portfolio management is an art, but it does not mean that artists are good portfolio managers. Artists are usually strong characters and can be very stubborn. This is their Achille's Heels. Portfolio managers need to think laterally, think at a higher level and even invert their thinking when necessary. They need to admit mistakes fast and be flexible to changes. This can be inherently difficult for some people.

We all know these people.

They talk by negating everything that is said. I believe most of us met these folks time and again. They cannot seem to agree with anything. One gets tired just taking to them. Every discussion is a debate, or an argument and they have to win. Every request is rejected. Let's get coffee at Starbucks, no, too expensive. How about Yakun? I prefer gourmet coffee. How about Coffee Bean? No coffee there is bad. Nespresso at my place then? I prefer cafe. Fuck.

Yakun Toast Set - Singapore's Default Breakfast

It's hard even to get them just to give a Facebook Like to your new venture that needed some support. They ask a thousand questions, give a thousand reasons and then say no, they are not going to like your venture's FB page. But then they expect you to like their Hokkaido tour pics. So these people can really make the baddest portfolio managers look good.

They can never see stock ideas or investment themes holistically. They will always be blindsided because when they like something, they cannot see the downside. When they hate something, they cannot flip their minds to buy when the stock rallies. Because that's admitting that they were wrong. They are binary people - people who think only in ones and zeroes. You are either friend or foe. This idea is good or bad. This stock is either in or out. There is no such thing as a 50bps position. This stock is either 50% of the portfolio or nothing. Hence they are always missing out or they hold on to their losers for too long.

Yet portfolio management is never binary. It is always analogue, with gradients and shades because we are never sure how things will pan out. So we have 50bps, 1%, 2% and our highest conviction bets 4-5% positions. And the 5% positions can become a 1% position when the stock rallies and the upside is no longer attractive. It's always incremental moves, never cocksure, always ready to admit mistakes and never believing one's right and the markets are wrong. Portfolio management is more an art than a science and hence there's always more right perspectives than wrong answers

How to be a really bad portfolio manager? To summarize, here's the three ways to really suck at portfolio management:

1. Try not to see the Big Picture
2. Don't be Rigorous
3. Be as inflexible as possible

Happy Good Friday and Huat Ah!

*Investors are essentially portfolio managers. We kept to the terms "portfolio managers" and "portfolio management" in line with the title and theme of this post.

Thursday, April 11, 2019

Books #5: Best Selling Books

Did a quick google check on most books ever sold. Interesting list - no non-fiction and the best selling book was not written in English. 

Fortunately for 2018, we do have some non-fiction. In fact mostly non-fiction. 2018 was definitely Year of #MeToo and Girl Power!

Haven't read Michelle Obama's autobiography, should be good! Meanwhile, just finished Shoe Dog by Phil Knights, founder of Nike. Amazing story, must read for investors!

Monday, April 01, 2019

Lesson from Bohemian Rhapsody - Part 3

This is a continuation of the previous two posts about lessons learnt after watching Bohemian Rhapsody, a movie about the famous rock band Queen and its lead singer Freddie Mercury. Freddie was a free spirited artist who lived recklessly. He brought joy to millions while bringing sorrow to those closest to him. Hence, he have the many life lessons that we can learn here. In this last post, we shall talk about a Chinese idiom - 祸从口出 (huo4 cong2 kou3 chu1).

In Chinese, the famous saying above states that disasters come out from one’s mouth. This is another lesson since time immemorial. Spiteful words are hurtful and could break friendships, bonds and even kinships. Words once spoken cannot be taken back and hence we should always be very mindful of how we speak and choose our words wisely.

Disaster comes from the mouth

It might be worth remembering that we should never say something evil or hurtful even if we meant it. We might mean it at the moment but we are bound to regret it later. Since words once spoken cannot be taken back, the person who hears it remembers it for life. Not for that moment only. So phrases like, “I wished I never had a father like you.” or “You are the most disgraceful child.” Should never, I repeat, never be said.

In one sentence, one’s life could change for the worst. So, never say things with hurtful or bad intent. For Freddie, partly as a result of his free spirited nature, he said things as it comes to his mind and his words pierced like katanas into those closest to him and those who cared about him. He sometimes meant it as joke or he just blurted it out at the spur of the moment. But it was painful to the listener (even for me, as the movie audience). He was mean to everyone, insulting reporters who were just doing their jobs. But for those closest to him, his poison tongue ossified friends, kins, partners. it was a miracle most of them forgave him.

In investing, this is manifested in stock price volatility.

Today, CEOs and leaders do not just say things. They can tweet, they can write and send company emails, they can speak rubbish at quarterly earnings conference calls and all that would be scrutinized by the world. One wrong tweet could bring down billions of dollars in market cap. Surely, Elon Musk comes to mind. His one tweet got him into serious trouble. (The one alluding to the Saudis taking Tesla private.) To upend that, he attended an analyst conference call and addressed it condescendingly which caused his stock to collapse further.

Elon Musk attacks!

Well, if we invest in stocks that had CEOs who are not careful how they speak, or write, then we need to be able to stomach that kind of volatility. Nothing against Elon Musk. He is a genius and a visionary. He just needs to learn the same lesson from Freddie Mercury. Fortunately, most CEOs and Chairmans are polished and learnt not to speak or write like that while climbing the corporate ladder. As investors, we actually have to look out for speakers who are too polished and are hiding things. The good news is: after years of interviewing managers, sometimes we can sense trouble. These skills do come in handy both in investing and in life.

Nectaring our tongues is perhaps more relevant in our family and social lives. We take those closest to us for granted and we simply blurt out hurtful remarks time and again. While some families, close friends and some teams can take lot of hurt and insult, I believe everyone has a limit. Yes, when we are very close, a lot of insults just becomes jokes after time. But I believe this should not be used to gauge that we are close enough. Even as close friends or families, we must remain vigilant. Never say things with evil or hurtful intent.

This is perhaps the most important lesson to me. So, that’s it. To summarise the four lessons from Bohemian Rhapsody:

1. Never betray those closest to you, parents, spouses, cadre friends. Although they will forgive you once or twice, but only so many times. Don’t live like a jerk. In investing, always look out for firms with financial and management integrity. If there is doubt, then move on, there’s not point in further analysing.

2. Never listen to just one advisor, identify the good advisors and listen to them wisely. In investing, beware of CEOs who doesn’t have the right advisors. Lookout for telltale signs like revolving doors of CFO and the other key managers.

3. Four heads are better than one. Teamwork works in creating music, in investing and in life. Don't always think you are right. We all need sparring partners who can make us better.

4. 祸从口出 (huo4 cong2 kou3 chu1)- disasters come from the mouth. Always think carefully before speaking. Words once spoken can never be taken back. Never say things with evil or hurtful intent.

Thanks Freddie Mercury. You are an inspiration but we never want to live like you.