Economists and historians have
long understood the necessity of balance.
In order to assess the probability of a trajectory, you have to be
closer to the “zed-line”, that point where, minimally, one’s odds of success
are 50/50, than closer to the end-point of a parabolic ascent/descent. For example, as we near the end of a
recession there is more reason for hope than when the initial storm clouds of
trouble were brewing.
For practical reasons, nothing
lasts forever. Managing change, and
risk, is more effective than waiting for change to occur. When it comes to market theory, there is a
big difference between strict fundamentals, versus quantifying the likelihood
that those fundamentals generate positive alpha for portfolios.
One runs into trouble, for
example, thinking that strict diversification is same thing as market weighting
leaders and laggards in a portfolio. On
its own, diversification is a scatter-shot, rough balance approach. The prospect of measuring which companies
might succeed makes more sense.
Many portfolios have been
crushed by the impact that one or more stocks might impose upon an
outcome. In today’s market, buying gold,
technology, basic materials, or cyclicals in large quantities might yield the
inverse of what the speculators intended.
While it’s not sexy, picking your battles in modulation can be
particularly more effective than an all-or-none approach. The tech wreck (2000) and the global credit
crisis (2007) are two recent examples of seriously overestimating the chances
for portfolio aggrandizement from what, on their own, are more serious threats
when taken in improper allocations. It
is the portfolio manager’s responsibility to look for the next bubble before it
occurs, and not to underestimate the statistical probabilities that are staring
him/her in the face.
While it appears that the
pieces are beginning to fit together in solving some global debt matters, we
know that the solutions are not achieved in the short run. Market rallies which emanate from news-driven
events are not cycles in the purest sense.
The real strength of conviction and belief lies in seeing several short
cycle events strung together to build a longer trend.
Adjustments must always be
made and anticipated. The tough
decisions from the Euro zone have been unable, as yet, to sway long-term
confidence. Obviously, the markets are
waiting for solutions that stress a palatability of alleviating the
crises. Since there is little “wiggle
room”, there is less time and patience that the public, and markets, can muster
when waiting. In a global sense, it must
be necessary to convince disparate geographies that the benefit accrues equally
to all regions and all interests.
While there is no sweeping,
single solution to the global debt/credit crisis, it is critical to see an
outcome which promotes growth, trade, expansion….and inclusion. At this juncture, withdrawing from the
process is not an option. The risks of
inertia are overwhelming. Coming at a
time when confidence is waning, it might be that perception of an effort to
build consensus could be as significant as the overall details of an agreement
itself.
The most pleasant surprise of
this summer’s rally is that we have reasonably held off a traditional “summer
swoon” which might have exacerbated the calamity had it occurred. Although the data are not significantly
better, really, the general panic and exasperation have abated somewhat.
Statistically, big upward
pushes must be followed by declines. As
we near the fourth quarter we are holding our collective breath to see if
statistics trump hope, or if the mathematical headwinds are simply too great at
this time.
No comments:
Post a Comment