Here’s a theory for you…
Good money managers underperform during the late stages of a bull market. Reckless money managers outperform.
I’ll explain what I mean by that in a moment.
But first, a quick comment on the latest shenanigans in US politics.
Long time readers will know this is a pet topic of mine. Not because I love Machiavellian intrigue. No, it’s because what is playing out is unprecedented in the history of US politics.
What you’re witnessing (but not actually hearing about via the establishment media) is an attempted coup of a US president. Russiagate, Ukrainegate, and now an impeachment trial in the US Senate, is all about getting rid of Trump.
Because he promised to ‘Drain the Swamp’.
For decades a corrupt elite has controlled US politics. If you own the presidency and infiltrate the intelligence agencies and the courts, you can pretty much do what you want. And if you own the media too, no one will know what you’re really doing.
This centralisation of power and information over the past 100 years has enabled this corruption to grow.
But the internet, that great tool of decentralisation, is fighting back. Of course, it’s not easy. Facebook and Google have done their best to become a censored, centralised portal of information.
But if you care to look, there are many news sources that reveal the deep corruption that is going on right now.
One of my favourites is the Dan Bongino Show. It’s a daily podcast. Dan is a Libertarian/Conservative. Portions of his hour long daily podcast are devoted to unravelling the web of corruption behind the attempted take down of President Trump.
If you subscribe to the podcast (it’s free) you’ll also get daily newslinks that give you an alternative narrative to the one that flows from the establishment.
I just listened to episode 1,160. It runs through a web of names all connected to Ukraine. It’s no surprise then that the current impeachment trial relates to Trump’s attempt to uncover the corruption going on there, involving Joe Biden and US government aid money.
Anyway, I wanted to let you know about this source of information. It’s very hard revisiting the topic from time to time and making all the connections in one essay. So if you’re interested, I highly recommend you check out Dan’s stuff. The information is excellent.
Getting back to my theory…
Good money managers underperform
That is, good money managers underperform during the late stages of a bull market. Reckless money managers outperform.
This happens because prudent managers start to take money off the table as prices rise. They increase cash levels. They know the short-term pain of doing this will bring longer-term rewards. That is, the purchasing power of the cash will increase relative to shares down the track.
At this point, let me say I am assuming that we are in the ‘late stages of a bull market’. I don’t know that for sure. Based on my experience, it just ‘feels’ like the market is at this point.
There is complacency and a lack of humility. On Twitter, for example, I’m seeing more people display their portfolio performance. When you’ve done well enough to want to show the world, then, well…
So while the experienced money managers are quietly taking profits and preparing for tougher times, the amateurs and reckless managers are buying. They see big gains daily and want a piece of the action.
They buy without regard to value or fundamentals. They buy in the hope that someone will come along and pay more.
And for a while, that someone usually comes along.
The thing is, people tend to chase performance. In the late stages of a bull market, people shift their money from underperformers to outperformers. Money flows to the risk takers. It pushes the bull market higher.
Fear and greed are two of the most powerful emotions that drive markets. Since the start of the year, I feel like the impact of ‘greed’ has been greater than it’s been for some time.
In this environment, people tend to have a low threshold for poor performance.
If you’re feeling it too, don’t worry. It’s natural. Just don’t let it seduce you completely. If your portfolio is underperforming right now, take solace in the fact that you’re probably in good company.
(I say probably because the data on fund manager performance for January won’t be out for a while. But I’ll look for it in February and revisit the topic then.)
But resist the urge to chase performance. Making important decisions under the influence of greed nearly always leads to trouble…