Variant Perception

I listen to a lot of investor calls and I spend a lot of time meeting with investment managers all across this great land of ours. Something I have noticed over time is how much time and energy some people waste loudly proclaiming their agreement with consensus.

For example, various permutations of the statement: “tax cuts are supportive of corporate earnings.”

No. Freaking. Kidding. Why are we still talking about this? Is there any actionable insight whatsoever in that statement?

As an investor I am interested in hearing where someone differs from consensus. This is where you are going to distinguish yourself. If your goal is simply to piggyback on the wisdom of the crowd you ought to own a bunch of index funds. That is, after all, the underlying premise of index investing: no one can consistently outguess the market. Put another way:

MARKET PRICES ALREADY REFLECT THE CONSENSUS VIEW

Of course, it is hardly a secret that much of what passes for market commentary is in fact just thinly-veiled marketing copy. Here’s the template (key phrases italicized):

Fund Company: A Scary Thing is happening in the markets, or might happen soon. This might Make The Prices Go Down. But if you do this Other Thing you may improve your chances at A Financially Secure Retirement and be able to fund your Children’s College Education. Oh, BTW we happen to have a product that does The Other Thing. Check out the performance. We are in the top quartile of our Morningstar peer group since inception.

Alternatively:

Fund Company: Someone Is Making A Lot of Money doing A Certain Thing. Now, we know some people say That Certain Thing is a little long in the tooth. However, our analysts are telling us there is plenty of room left to run [shows chart of forward earnings estimates without mentioning that forward earnings estimates are notoriously unreliable]. Oh, BTW we happen to have a product that does That Certain Thing. Check out the performance. We are in the top quartile of our Morningstar peer group since inception.

Personally, I read market commentary as meta-texts.

When a fund company writes about A Scary Thing, that is a cue that a certain area of the market is viewed as risky. And if a lot of fund companies are writing about A Scary Thing, and are in agreement about the level of Scariness, there is a decent chance assets exposed to the Scary Thing can be bought at a discount.

Why? Fund companies don’t like to own assets that threaten their business (read: management fees). So they don’t bid the prices up. Similarly, Fund companies like to own popular things. Why? Because popular things attract investor flows (read: larger management fees). So prices get bid up to unsustainable levels. There is an inherent tension in the investment management business between what is good for the business and what is good for investment results.

The best investment managers think of the portfolio first and then the business. They are willing to run a smaller business to preserve returns. This is not a trivial thing. Particularly for someone with a strong track record. So, as always, #notallfundcompanies applies.

I leave you with these exhibits from Kevin Martelli:

MartekQ
Source: Martek Partners via MicroCap Club
MartekA
Source: Martek Partners via MicroCap Club

 

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