I have seriously mixed emotions about not being a portfolio manager during the current crisis. I sincerely miss the detailed analytics behind each investment and the buy/sell decisions (yes, even the decisions to sell at a loss). I miss the tenseness and emotion – I was intimately involved in the underpinning mechanisms behind our daily lives and the vast majority of the world didn’t understand or was unaware.
What I do not miss are the constant calls or pings from brokers trying to move product or maintain relevance. And, as usual, I was inundated with market research and opinions. Like TV news, those who published research competed and tried to maintain relevance; my problem was that I wanted to read all of it. Frankly, I also do not miss the constant requests for updates, reports and questions about something someone saw on the news. Communication is important and necessary, and the funds I managed weren’t mine, but I selfishly wanted to focus on being a PM.
This crisis has grabbed a number of previously buried memories. I have experienced a crazy number of market crises. My first was the rapid increases in rates by the FOMC in 1994 that essentially put the small firm I was with out of business. Others include the recession of 1990-91 and the downturn in commercial real estate; the collapse of long-term capital management in 1998 and the ensuing crash in the U.S. CMBS market; the dot-com crisis; 9/11; the global financial crisis; and multiple other minor crises such as fallout in telecom spreads in 2002 and the 2013 taper tantrum. As I search for lessons that applied to all these crises, the following come to mind:
Hunker down: Economic and market crises almost never resolve themselves as we initially hoped. In late January and early February, market experts, politicians, and leaders opined that any down-turn in the economy would be V-shaped with a relatively quick recovery. Gradually the predicted vector of recovery has morphed to U-shaped, implying that the upturn in economic conditions would be more gradual. Now people are claiming that the upturn will be quick if we can just make it through June and have ample supplies of ventilators and masks and testing. Even if we miraculously have a cure in June, the structural damage from the shutdown in the world economy is already severe and the costs are still being tallied. There are multiple secondary and tertiary effects that are just now starting to boil to the surface. Any recovery will take time — a long time.
Record your thoughts daily: News is coming at you fast and there is a significant amount of noise in your daily routine and work life. If you don’t record your frame of thought and decision reasoning it will be lost quickly. Keep a log and jot your thoughts down as you are able, regardless of the brevity or simplicity. When this crisis does begin to subside, there will be second-guessing, regret and attempts at recrimination; it’s just humans being humans and we’ll all do these in some form. You will want to have a good record of your decision reasoning.
Remember your fiduciary duties: This sounds simple and most PMs pride themselves in their fiduciary discipline. Nonetheless, re-reading the primary goals of the portfolios that I managed often helped me prioritize and reinforce difficult decisions. Importantly, you will likely receive advice (solicited and unsolicited) from a wide range of people that are not intimately familiar with the investments and goals of your portfolios. Some of whom will attempt to use this crisis to further personal, career or social goals. It will be easier than you think to stray from the primary objectives of your portfolio.
Accept the new realities: You likely have some serious losses in your portfolio that “you just knew” would be great had it not been for the onset of COVID-19 or the oil dispute currently between Saudi Arabia and Russia. My advice here is somewhat wishy-washy in that you don’t want to panic, and you may want to preserve some exposure to recovery scenario. Nonetheless, an amputated arm is a better outcome than bleeding to death. Of course, market conditions may not allow you to sell quickly, but when the opportunity arises, sometimes you need to bring risks into alignment, accept losses and go home in a bad mood in order to free capital for new opportunities.
Make your own decisions: You will receive a constant barrage of predictions and analysis. Most of the input you receive will be well-intentioned. Some of the research behind the input will be thorough but some less so. All of it (including your research) will be biased (intentionally and unintentionally). Immediately after the Deepwater Horizon Gulf oil spill, dire predictions regarding the eventual demise of British Petroleum were widespread especially after a $20 billion fine was levied against BP. It did not take significant fundamental analysis to understand that the predictions of BP’s end were overblown.
Introspection is useful: Put some thought into understanding your biases and try to make peace with them. Importantly, the more you become aware of your biases the better you can hedge undesirable risks that are likely in your portfolios. You will be making many decisions in crisis mode, and your internal biases will heavily influence your frame of mind. It’s okay if you are comfortable with many of your biases. For example, I came of age in the markets when corporate cash generation was king, and the U.S. seasonal economic and market action was mostly driven by the U.S. domestic activity and I left a lot of money on the table over the years adjusting to rapid changes that occurred in the world economy and markets. Nonetheless, I was comfortable with portfolios that tilted to corporations with good cash generation stories but alternatively I needed to more consistently hedge against the influence of greater international money flows on market valuations.
Please check back here for more analysis. In the next several weeks, I’ll focus on the utility of specific analytical tools. However, the many tools and information at your disposal is greatly improved with a disciplined process. As always, feedback is greatly appreciated, and I hope this helps.
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