January is nearly over, so it is once again time to look at the various errors, mistakes and bad calls that I made in the asset management business in 2011. I have made ‘fessing up part of my process – this is my third annual version (see my previous mea culpas for 2009 and 2010). I have made this an annual rite of contrition. Each January, I set down on paper my Mea Culpas – owning up to the errors, mistakes and failures that are a regular part of the investing process.
For most money managers, 2011 was a challenging year. But I am less concerned with under-performance as a Mea Culpa, choosing instead to focus on the process (for the record, we outperformed our benchmark, and did so with considerably less risk).
First the good news: Assessing what did right in 2011, there were plenty of things to be pleased with: The Macro calls worked well, we stuck to our discipline. We avoided the entire August collapse. Buying into the breakout in October, we quickly reversed ourselves when it failed. And when the signs were to go long and strong to start the year, I held my nose and did so.
As always, in the business of managing assets, there is always something new to learn. This morning, I want to look not at what I got right, but rather what I did wrong, where there is room for improvement. We will also revisit prior mea culpas to see where we have been fortunate to improve as a result of these annual lists.
Let’s have at it:
1. Running Assets vs. Managing a Business: It may be obvious, but these are two very different skill sets. I first mentioned this last year – and though these are supposed to be mea culpas, I have to give kudos to a pair of outstanding hires: Josh and Anna. They make me better, and for that I am grateful.
Possible solution: Learning to be a business manager versus an asset manager means reaching outside your comfort zone, educating yourself, pushing into new areas. But the key: Find more outstanding people and hire them.
2. Confirmation Bias: I find myself reading more of the analysts whose current views I agree with and less of those whose views are opposite my own. Off the top of my head: Laksman Athushan, Jim Bianco, Michael Belkin and John Hussman. I need to find people whose macro views differ from mine as well as those whose market perspective is more aggressive than my own.
Possible solution: Read more of the folks I occasionally disagree with like Doug Kass, David Rosenberg, and others. Worry less about hunting for that nugget of info and more on the process others employ to challenge my own views.
3. Articulate policy and principles: I have a pretty firm set of beliefs when it comes to investing (seen in about 6,000 posts on the blog), but I have yet to put it down in a short format. This is a function of laziness and fear of ridicule.
Possible solution: DO IT. Break the beliefs down into 10 key principles, post them somewhere, and review annually. Forget about the opinions of the public and focus on what matters most to yourself and your process.
4. Skepticism: I tend to disbelieve/distrust/ignore new sources of info. I have begun to grow cynical. This has led to unfairly dismissing new sources of information/analysis/commentary. The secret to being skeptical — and to Sturgeons Law — is to not reject 100% of everything that comes your way, just the 95% that is crap.
Possible solution: Consider the what ifs before rejecting something. Might this analyst be correct? Might their process work out? Be more generous with your attitude rather than being so dismissive.
5. Communication: A new issue for me, as I added lots more individual clients. I was very inefficient when I came to communicating with both new and prospective clients. Its not that I didn’t communicate; rather, it was haphazard and disorganized. Too many phone calls, too many calendar conflicts.
Possible solution: Organize: Create a system of communication to both existing and prospective clients. Use technology, conference calls, webinars to reach people in a more efficient way.
6. Time Management: An annual issue, although I did get better at it this year (see #1 above). Focus more on research, writing, and asset management –let the rest come to you.
Possible solution: Prioritize: Do less of what matters least; Work with a daily checklist to make sure things get finished; Focus.
7. Clients: It is always a balancing act when dealing with clients. On the one hand, you cannot blow them off when they bring you concerns (its their money!). On the other hand, you cannot allow the investing public’s group mentality (or panic) to infect you. Further, we took some heat for calls that turned out to be correct, but in a few cases, took steps at the request of clients that lowered overall performance; that must stop.
Possible solution: Be proactive. Improve regular communication with all clients; Work on making sure they understand the process, our current thoughts, and where we are so as to avoid the 2nd guessing. Preempt the “My way or the highway” conversation proactively;
8. Undercapitalized: I worked on several projects where capital was a major issue. This is something that is singularly important to any new entity. The bootstrapping approach seems to work in very rare circumstances where there is an immediate influx of revenue, but for moist start ups, it’s a pipedream. You cannot grow a business when the daily focus is raising money.
Possible solution: Steer away from firms that have too little capital. Make sure that the structure is appropriate. Avoid the classic undercapitalized but over enthusiastic founders.
Follow up from prior year’s Mea Culpas
1. Too Many Equity Mutual Funds: I have always known mutual funds were a mixed bag, and last year, I finally did something about it: In my asset allocation model, I slowly replaced mutual funds with ETFs. A portfolio I took over began with 8 funds and 2 ETFs; that raio is now reversed.
Actual solution: Used more ETFs more to increase exposure quickly so we carry less cash sooner and raise exposure more quickly; Better to own positions with tight stops, or to own half positions, than none at all;
2. Putting Cash to work: Despite making the right call in early March, we legged in slowly. I am not suggesting that you go all in on a single day or week, but the process of going from 80% cash to fully invested took longer than it should have. Directly related to the two points above, when the market is rallying aggressively, we need to carry less cash sooner and more exposure more quickly;
Actual solution: iShares Barclays 1-3 Year Treasury Bond Fund – rather than sit with a 40% cash position – even for a month – the 1-3 year yields something, and if we are right on why we moved to cash, may even appreciate.
3. Focus!: We all have many items calling out for our attention; but having too much on your plate means things fall through the cracks (like that option trade!). Our modern short attention span society has the appearance of being more productive, but probably isn’t. Free association is great for creative brainstorming sessions, but winging it during execution means stuff is going to slide.
Actual solution: The checklist! When I stick to my TTD, I can be wonderfully productive. Must stay with that in 2010.
4. Health: After years of neglect, I promised myself that when I turned 50, I would start taking better care of myself. Your body is a used car, and if you want to get to 150,000 miles, you need to do more than put in petrol. (I was embarrassed to put this down as a mea culpa last year).
Actual solution: Went for my first check up in years. (Blood Pressure/Cholesterol are excellent) On a diet, going to the gym, running again. Colonoscopy scheduled for the Spring. Now the trick is to trick to it.
As always, ideas, suggestions, and hints for improving are always welcome!