Mea Culpas for 2012

Every year in January, I look back at the prior year to assess the various errors, mistakes and bad calls that I made in the course of running an asset management business.

I make a list of these mistakes, analyze why they occurred, and what I can do to avoid similar errors in the future. This is my 4th go round, and I have made ‘fessing up a key part of my process (my previous mea culpas can be found for 2009, 2010 and 2011).

This is not simply a rite of contrition — in this business, you must expect to be wrong. Owning up to your own mistakes is the only way to a) get better; b) admit that failure is part of the investing process; c) stay humble.

2012 was a tough year for many, despite a robust set of gains for equities. The S&P500 index returned 13.4%, plus another 2%+ for dividends = >15% for 2012. Lots of managers missed this benchmark (My benchmark is a total return 60/40 model).

This is not about absolute performance, but rather the process that impacts those outcomes.

Let’s get to it:

1) Tactical Moves: 2012 was not the year that tactical was an especially successful formula. (Many Tactical Asset Allocators under-performed). A few of my tactical moves worked out, but more than a few did not. There are costs and taxes associated with being tactical when you nail it perfectly, and opportunity costs when you are wrong. Tactical led to excess cash at times throughout the year, and that impacts performance.

Solution: My goal in executing tactical moves should not involve avoiding 5-10-15% retracements, but should aim to steer clear of 25% plus moves to the downside. Reduce tactical moves by tightening metrics for evaluation.

Use tactical more sparingly – it should be a 2X per decade shift, not an annual event.

2) RE/Housing Market: I doubted, and continue to doubt, the recovery in the Housing market. I expected foreclosures to tick up, the REO overhang and the underwater owners to continue to weigh on the market.

I was wrong.

Instead, the market stabilized, and prices rose.

The Fed’s Operation Twist managed to drive rates even lower than they were, increasing purchasers’ buying power. Mortgage settlements have given banks more flexibility in dealing with REOs, and appetite for Homes as part of the American Dream is still alive and well.

Solution: I am still aware of the inorganic nature of this improvement, but the key takeaway is a) US housing market down 35% eventually stabilizes; 2) do not under-estimate the ability of a determined Central Bank to impact any specific market it chooses.

3) JP Morgan: I have been critical of the TBTF money center banks that have opaque balance sheets, but a balanced portfolio has some exposure to financials. Our solution was to own companies with cleaner balance sheets and less credit risk: Think Visa and Berkshire Hathaway. But Jamie Dimon’s so-called “Fortress Bank” suckered me in, and 6 months later the London Whale took all of our profits in the position away and then some.

Solution: More courage of my convictions. Find alternatives to garner the exposure to a desired sector, and avoid owning what you cannot possibly understand potential risks. Be aware of the trend but do not accede to the crowd.

4) Facebook: After berating Facebook for the better part of 2 years on valuation, fabricated metrics, and a weak business model, I began to wonder if everyone else was right and I was suffering some of my own confirmation bias. These self-doubts led me, as the stock came in on the day of the IPO, to buy Facebook for aggressive portfolios. The good news our is stop loss discipline was the IPO price, and I kicked it before the day was over.

Solution: Have the courage of your convictions. Yes, I owned Facebook for less than a day, but I never should have bought it until it was closer to my valuation of $12-15. If sometimes you have to miss a move because there are warts on it that might blow up, so be it. (Similar to JPM)

5) Global Macro: One error I made this year was allowing macro views to trump our more pedestrian day-to-day investing approach. We all love to look at the really big picture, but in 3 out of 4 years it has not been a good way to make money. This investing approach does work well at major turning points, but the rest of the time it creates excess activity and potential for loss.

Solution: Asset allocation has proven itself over time. Stay with it; do not allow yourself to be distracted by the noise.

6) Individual stocks: In addition to broad asset classes we own, we also buy individual stocks that we have a high degree of confidence in (these are only for not conservative accounts). Some have been home runs (V, BRK, CVX) others have been losers (JPM, FB, COP).

However, all individual stocks carry additional risk that you do not get with an index. While this has not hurt our performance, it has increased our volatility and decreased our Sharpe ratio.

Solution: Use individual stocks more sparingly to fill in holes in exposure.

7) Dealing with Crappy People: Having a public persona means you have to deal with people who as a private citizen you normally would not. Writing in public brings about all manner of haters, jerks and creeps. My naturally combativeness leads me to instinctively engage with these folks on their level.

Solution: Twitter battles, flame wars, comment headaches — all waste time and emotional energy.  There is no obligation to interact with jerks. Disengage from them. Block the Twitter haters, ban the nasty commenters. Distinguish between legitimate debate and ideological silliness. Constructive comments and legitimate disagreements are very different than ad hominem attackers. There is no requirement to publish the comments of liars or haters.

If I want to reduce the level of cynicism and negativity in my life, it helps to get rid of the carriers of that emotion.


Those are the big ones for this year (there are more little ones, and some personally embarrassing items that missed the cut off).

Come back in 12 months for a whole new set of different mistakes.

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