A Money Managers Dilemma

April 25, 2012 11:24:00 PM


Investment success does not come from following the predictions, it comes from following the right principles.


As investors begin to experience greater volatility in the stock market recently, I think some perspective is important.

First, after a horrible investment climate for most of 2011 for many investors, markets have seen a very nice rebound in asset prices in the last six months.

Remember, markets and more importantly, asset prices do not go straight up!

This leads me to discuss one of many dilemmas active money managers constantly face.

What is the big dilemma?

My experience in portfolio management has shown me that emotions drive most short-term investment decisions made by investors, not fundamentals of companies owned.

Because many investors are focused on short-term returns, not long-term returns, many investors expect results immediately! However, if you are an investor in a business, not the stock market, expectations should be that returns are long-term in nature, not short-term.

People have and will always debate the future value of a stock at any given time. However, many variables play into the short-term value of a stock\, or as I prefer to say, the value of a company.

Many investors have a pre-conceived notion that when they hire a money manager they expect their manager to manage their money and invest it immediately.

Herein lies the dilemma; from my perspective, portfolio management must include managing risk over time. Focusing on Risk Adjusted Return. Therefore, sometimes, it may make sense to leave a portion of one's investment portfolio in cash as opposed to chasing short-term returns or the hot stock of the day.

The fact of the matter is, most daily movement in the stock market and in many companies stock prices, is driven by program trading or short-term events causing investors to buy or sell first and ask questions later.

Because of the many variables affecting the short-term price (not value) of a company, having flexibility managing one's portfolio becomes paramount.

Why is flexibility so important?

It is the flexibility which provides the opportunity for an investor to buy more (or sell) of a company when appropriate.

Obviously, there are many variables that affect the value of a company short-term and long-term. As an investor, understanding the investment philosophy and strategy of the one's portfolio and the investment decisions in ones portfolio is paramount.

If you are not willing to accept volatility and invest in companies for at least a 3-5 year time horizon, it may make sense to review your tolerance for the associated risks or volatility in owing stocks.

The stock market is going to be volatile. One must get used to it, or, don't own stocks.

This is why, I believe, investing with clarity&trade\;\, it the cornerstone to being a successful investor short-term and long-term.



Mark Pearson

Mark Pearson

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