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.
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.