"Even if you’re in a bubble and you know prices are too high, you look pretty stupid if you sell too early. " —> you made a sensible rebuttal. Selling early doesn’t look stupid after the bubble has burst, but bubbles can go on much longer than one expects (like housing) and you have to have the fortitude to stick with your conviction that things are overpriced while your competitors in the bubble look like they’re making buckets hand over fist (and perhaps your clients are leaving you because those other guys look like they’re doing so well). I agree that if you have a long enough time horizon, this seems like a sensible market in which to buy either diversified equities or highly researched stock picks. The issue is probably that lots of people have to worry about quarterly performance, and the best decisions for those folks are very tricky still.
Yes I agree with you 100%. It’s an aspect of the industry I find very frustrating. The reality is any fund manager that was heavily underweight equities in 2006 and 2007 would have lost most of their clients and personally foregone huge bonuses. Of course those very same clients will now be making angry phone calls once they receive their year end statements asking how the hell did the fund manager lose 40% of their money! I’m not sure what the answer to that is, but the commercial reality is that very few can afford to take as long-term a perspective as Buffett.
“Even if you’re in a bubble and you know prices are too high, you look pretty stupid if you sell too early.” = Mantra of a speculator. That notion is akin to ascribing value to the greater fool theory of investing. It is never an intelligent decision to purchase an over-valued asset because one believes that someone dumber than oneself will buy it from you. Unfortunately the institutional nature of finance prevents individuals from taking a long-term view - which is a shame because a lot more money could be preserved under that paradigm. The only way to pull that off is to have overly restrictive liquidity terms (if you are managing a HF) or be Buffett. (or managing your personal $$$ - time arbitrage…) There is this notion that holding cash is a mortal sin. If your valuation discipline says that the market is overvalued the safest place is cash and you are performing your duty as an IM. The basic goal of compounding money at attractive rates over a long time horizon is met by avoiding large losses on the downside - not swinging for the fences. Large allocations to cash accomplishes that and I applaud former trader for sticking to his guns. I’ve been putting my own personal money to work over the past 4 months and continue to buy gradually over time in undervalued situations.
“If your valuation discipline says that the market is overvalued the safest place is cash and you are performing your duty as an IM.” But like bchadwick suggested, if you were an IM parked in cash in 2006 most of your clients would have walked. You’d have been right and they’d have been wrong, but that won’t save your business from going under. What can you do to control clients better than that?
Carson Wrote: ------------------------------------------------------- > “If your valuation discipline says that the market > is overvalued the safest place is cash and you are > performing your duty as an IM.” > > But like bchadwick suggested, if you were an IM > parked in cash in 2006 most of your clients would > have walked. You’d have been right and they’d have > been wrong, but that won’t save your business from > going under. > > What can you do to control clients better than > that? I agree - I wasn’t disagreeing. Restrictive lock-up terms (if you are a Hedge Fund), being Warren Buffett, have a solid long-term track record, or having an investor base that is in sync with your ideology (take for instance Mohnish Pabrai - mostly family and friends $). You could also accomplish that by being selective in terms of who you let into your fund - i.e. turn away all hot money including FoF - the lowest form of institutional capital