A MARKET WATCHER should watch the market.
I suppose I could fix my car, do my own dentistry or reshingle my roof. But since I have neither the expertise nor the time to devote to these critical tasks, I hire professionals to do these jobs for me.
The same holds true for managing money. Just because you can trade for pennies on the web doesn’t mean you necessarily should. The markets aren’t rocket science, but they can be a full-time job. And while most people are perfectly capable of managing their own account, many simply don’t have the interest or the time to do it properly.
In investing, picking the jockey is almost as tough as picking the horse. There are literally hundreds of thousands of mutual funds, financial planners, account executives and investment advisers eager to grab their 1%. Where do you begin?
A good accountant is invaluable, but insufficient — after all, you’ve got to make money before you pretty it up for Uncle Sam. And while the best stock analysts might be able to tell you how many Huggies Wal-Mart (WMT) is going to sell in the third quarter, what can they tell you about improving your portfolio’s bottom line?
While I can appreciate the value of an attentive financial planner, I find that far too many are wet behind the ears. Somewhere along the line, their version of “analysis” became hypothetical, pretax profits based on a 12% annualized return from stocks. We see how well that turned out.
No matter what a person calls himself, from a financial adviser to an investment planner, if he’s managing money and investing it on other people’s behalf, I think the least he should be doing is watching it. I’m always surprised how many investment professionals find time for conferences, lunch, cold calls and golf outings during market hours.
Call it the “index effect.” Because of the popularity (and returns) of index investing during the late 1990s, many investors stopped watching the market, and started simply pitching its virtues. Because of their dogmatic allegiance to stocks, most pros still can’t see beyond the Standard & Poor’s 500. It doesn’t help matters that most money managers’ compensation is based on assets under management rather than performance.
Ask them about the market, and they’ll talk about the economy, Iraq, earnings, Greenspan — everything under the sun except the market. Far too many money managers think they should be panelists on Meet the Press. A money manager’s job isn’t to pontificate about politics or opine about the economy, but to watch the markets.
Of course, nobody knows what’s going to happen in the future. In a sense, we’re all “dumb money.” But the people who put in the most time, in my opinion, are slightly less dumb than the rest. And as we’ve mentioned in the past, trading is less about anticipating what might happen than it is about understanding what’s happening now.
Where’s the action? When it comes to seeking profitable opportunities, a good money manager doesn’t play favorites. The entire spectrum of markets, from stocks to bonds, currencies to commodities, should be considered. When market trends develop, I can’t always tell you why but I know they’re happening, and that’s enough. These days, if you’re getting investment ideas out of a newspaper, you’re arriving to the party awfully late.
The best money managers are the most educated — by the market, not books, business school or the latest musings from Armani-suited analysts. And while I love weekends spent in the tub browsing the collected works of Barton Biggs as much as the next guy, I can’t help but think most clients are looking for returns more than research reports. So even if your manager has the prettiest junk mail of the bunch, at the end of the day, it’s all about bucks. Everything else is conversation.
Don’t trust your assets to anybody who isn’t going to, at the very least, keep a closer eye on them than you will. Like the seasons, stocks move in trends. You can’t game the market without sticking your hand out the window.
The ultimate litmus test for your money manager? Ask him how he’s investing his assets. I wouldn’t even consider a money manager who didn’t invest right along with his clients. There’s no bigger mark of credibility than practicing what you preach. Yet I see money managers happily recommend plenty of stocks they haven’t bought for themselves.
It’s an “ego hedge” you see practiced almost every day on cable business television. From Art Hogan to Ned Riley, experts will recommend a stock they don’t own. If their pick rallies, they don’t benefit financially, but they do look like a genius. If it falls, they might look a bit foolish, but they don’t lose any dough. I don’t know what’s worse — gurus recommending stocks they own, or stocks they don’t own.
Managing money is tough even in a good market. If you’re not watching what’s going on, your investment manager should be. And if he isn’t putting his money where his mouth is by investing along with his clients, perhaps you should find someone who will.
– Originally on Sep 23, 2002 by Jonathan Hoenig
