E
(efficiency/outcome)=T (time) x O (opportunity)
How is it that two
investment portfolios, of similar construct and asset allocation, might achieve
vastly different track records? Doesn't
it seem perverse that two accounts, both holding similar securities, might be
so different that one customer outpaces an annual benchmark while another falls
behind?
Perhaps not if you
reference for illustrative purposes my rather crude attempt above to help you
focus upon the most important element to any portfolio outcome, time.
Admittedly the formula depicted above is neither scientific nor
factual. But it lays out for all to see
a critical examination of how and why a portfolio builds wealth. In fact, I would argue that those components
are impactful for almost any endeavor in which one "puts in the work"
and expects an outcome as a result.
Let me state the
obvious: if one invests immediately ahead of a credit crisis, or a dot.com
bubble, or a major tariff announcement...that is, just prior to a huge downside
market skid....the odds are that you too are going to suffer a sympathetic
negative consequence. On the other hand,
if you invest after these catastrophic events, and if the market
goes on a reasonable recovery pace, then you are likely to participate in the
recovery also.
Simplistic? Of course.
But understanding the obvious...that events tend to traverse parabolic
ups and downs....is the essence of being a successful investor. In fact, a successful anything!
Why should I spend
valuable paper, and your time, writing about this? Because it is surreal listening to people
bemoan their fate when the justification and data...what I call
"process"...is so clearly right in front of them. Look, I hate losses, realized or unrealized,
as much as anybody. Last week's intensifying
conflict of tariff assessments between China and the US, for example, was an
unnecessary exogenous influence over the markets and economy. There is no question that as a result of
these and other factors a significant mark-down phase has already begun
comprising most all sectors that reached their all-time highs just several
months ago. Such is the susceptibility
of stocks at this late stage in the bull market recovery.
But take a step back and
review the fundamental long term arc of the economy and your portfolio, and
accept that cyclical phasing, up and down, occurs even when the historical trajectory
is comfortably bottom-left to top-right.
No time to waste
I had a new client ask
me recently why it was taking me so long fully to allocate the cash he
delivered to my firm. I explained to him
that asset allocation does not occur on day one, nor perhaps in a month or
two. I reminded him that ahead of
critical negative inflections it would be smarter to wait on the proper time in
each asset class that we were going to execute to achieve his objectives. Anything "arbitrary", without
scientific or quantitative justification, would be irresponsible.
The
value of these scientific tools is to imbue each portfolio with essential
qualifiers which help to implement a desired outcome. Thus, these quantifications sort through
subjective irrationality to help optimize consistency of performance.
Similarly, operating
without a science or methodology (process) creates an unnecessary bias, in and
of itself, towards a risk oriented portfolio.
Therefore, as asked
above, two portfolios of similar construct and allocation, might be as
different as night and day if they ignore the element of time and the intersection of
trends, and other quantitative measuring techniques that screen for very
specific return characteristics.
I concede that if anyone
were able to divine, before they occur,
every emotionally-driven subjective
blunder; every irrational tweet; any politically disruptive declarative
judgment; all exogenous news events; he/she would be a scientific marvel, a
clairvoyant, and probably lounging on a yacht in the Caribbean right now......
The fluidity and
unpredictability of the market's current processes is presenting a very unique
challenge to those who are perpetually wedded to a "status quo"
mindset.
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