Left in the lurch

10Feb09

There is nothing like trying times to expose the cracks in the foundation of common investment wisdom.  This down market cycle is no different.  Pillar after pillar has been exposed as being flawed in some fundamental way.  The challenge for investors today is to craft a coherent investment strategy amidst the wreckage.  Unfortunately wherever you turn, trouble lurks and your work is just beginning.

Buy and hold investing, the dominant methodology practiced by mainstream financial advisors, has been decimated in this downturn.  One need only look at the poor performance of the S&P 500 for the past decade.  Down some 5% per annum is not going to fund anyone’s retirement.  If you cannot rely on the capital markets to provide adequate returns, where else can one turn?  (For a defense of buy and hold investing.)

The bursting of the housing bubble and the subsequent economic downturn has brought out a whole class of pundit that claim to have foreseen the current state of affairs.  One of the most prominent has been Peter Schiff.   In a real sense Schiff forecasted some of the adverse economic events we are now facing.  However, his money management clients have not, as of yet, benefited from this foresight.

Indeed much is made of the prognostications of Nichols Taleb and Nouriel Roubini, but there again one needs to properly translate those views into actionable ideas.   In this downturn only one hedge fund manager, John Paulson, profited handsomely from the wreckage of the housing bubble.  And for his trouble he seems to be garnering a fair amount of unwanted publicity.

Can we look to the talking heads on television for a better brand of advice?  Again, not really.   CNBC is built on “conflict” and a “cacophony” of voices.  The most prominent being Jim Cramer.  If nothing else, Cramer provides any number of actionable ideas for investors every show.  Two questions:  are they any good ideas, and even if they are money makers are they worth following?  Not surprisingly the answer to the first question is that Cramer’s picks by and large trail the market.  Second, any reasonable person watching his show would have a hard time pulling the threads of a cohesive money management process out of the cacophony of noise.

The bottom line for any one trying to follow the picks from any member of the media is this:  the talking heads are good for only one thing, talk.  False expressions of certainty serve no usual purpose for the investor.  It matters not on whit to them how your portfolio performs.  Presumably the smart money could do a better job than the talking heads.

Bernie Madoff was supposed to be smart money.  One can see how that turned out for individuals and institutions alike.  Hedge funds and the endowments were supposed to be smart money, but many of them are now facing the prospect of client withdrawals and cash shortfalls.  In short, no one has all the answers.

Where does that leave an investor today?  Left in lurch.  These are unprecedented times filled with volatility and opportunity.  Ironically it may very well be the best time to come to terms with a new investment philosophy.  Investment strategies crafted during the “great moderation” now seem downright quaint.

Investors should at this point realize that they are on their own. They need to craft an investment strategy that is both coherent and actionable.  CNBC and the pundit class can only serve to distract investors from the important task of building a solid portfolio.   In our next post we touch on some themes that can help guide investors in the search of a better portfolio process.*

* Either that or wait for Bill Bernstein’s new book on personal investing.

Part two of this post follows.

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