How to be a Bad Portfolio Manager
Is portfolio management art or science?
This post first appeared on 19 Apr 2019 on 8percentpa.blogspot.com and we have updated it for substack.
Portfolio management is probably more art than science. But most professional fund houses approach portfolio management scientifically. We use so much data and models to justify our buys and sells. But the numbers speak for themselves. 80% of all professional portfolio managers cannot beat an index like the Straits Times Index and the famous S&P500.
Good portfolio managers are a unique breed. Especially those who had been humbled by the markets time and again. Then 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 picture below shows Stan Drunkenmiller, #2 for George Soros and one of the best portfolio managers in our time. He never had a down year for 30 years and compounded returns north of 25% pa.
Portfolio managers are artists. They possess the ability to synthesize a lot of information and come up with a Big Picture of the financial world. But this Big Picture in their mind is never fully completed. It is constantly being repainted to adjust the changing realities of the financial world. Their portfolios reflect newly discovered truths by putting bets taken to express views that can make money when the markets find out about them later. Portfolios are their masterpieces, their lifework.
Portfolio management requires rigor. It is mentally exhausting hard work detrimental to human posture - reading and discussing with people over many hours every day. Portfolio managers do mental aerobics and sparring eight hours every day and then sleep and dream about stocks. When they wake up, they eat and breathe bonds, rates and news.
So how hard it is to be a bad portfolio manager?
Just slack. Relax in your comfort zone and focus on your little bubble of limited knowledge. Come up with your Small Picture of your world and think you will always be right. Then go watch Netflix and spend time mindlessly on the phone. Eat, sleep and breathe Korean drama and standup comedy. That’s the first step. Most professional portfolio managers are perhaps doing this.
To most, portfolio management is just a job, like any other job. There is family, life, hobby, friends. Their passion is not their job. When it is not a passion, then it is difficult to be engaged all the time. That is why most portfolio managers fail. They were neither rigorous nor passionate enough.
But it takes more than just passion and rigor. Another important trait that good portfolio managers possess is the flexibility of their minds. They are never stubborn. They see mistakes fast, learn from it and move on. Stan Druckenmiller, during an interview in 2019, was just admitting his mistakes throughout the interview. He did not see this coming, he missed that. Let’s not forget, this is one of the best portfolio manager the world has ever seen.
Stan also shared how he always try to reconfirm his views and if they are off, he quickly readjusts the way he invests so that he can avoid losing money. After 30 years, he saw it time to call it a day as algorithm trading disrupted the way he used market signals to make money. He decided it was time to move on (but only to setup another shop later).
This is flexibility.
Portfolio management is an art but this does not mean that artists are, by default, 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 Tiong Bahru Bakery, no, too expensive. How about Yakun? I prefer gourmet coffee. How about Starbucks then? No coffee there is bad. Nespresso at my place then? I prefer to drink at a cafe. F*ck.
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 half-position. This stock is either 30% 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 2%, 4% and our highest conviction bets could be 6-8% positions, never exceeding 10% (or some other threshold you set). And the 6% positions can become a 2% 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.Â
How to be a really bad portfolio manager? To summarize:
1. Try not to see the Big Picture
2. Don't be Rigorous
3. Be as inflexible as possible
Huat Ah!