How Do We Manage?

How Do We Manage?

In my mind, there are a lot of different ways to manage money successfully. The problem seems to be that plenty of people don’t particularly recognize this, or that what works also changes, which is the source of a lot of major performance problems.

For instance, plenty of people seem to have been convinced that something like ARKK was the way of the future. Why? Most likely, it was a question of fear and regret. They’d missed a big move and wanted to get on board. It’s the good ol’ performance chasing that we always see when a flood of money comes in and disrupts the market. Flows come in after the big move, or at least after the big move is well underway. ARKK did well, for a while, but the average dollar invested didn’t do so well.

Another pernicious problem is the holding period. Lots of people say they invest for a year or longer but chase daily and weekly moves. Similar to the above, people watch a move start to happen, then, after the move, they start to invest.

Ultimately, stocks move. A bear market is created to frustrate both bulls and bears. It’s a great way to shake everyone down and take their money. Nothing moves in a straight line. It gets oversold, bounces, and sucks people in. Eventually, people throw in the towel and sell en masse, which is generally a great time to buy.

Look at the chart below of 2022 performance. It was considered a bad year. Stocks certainly went down. We’ve had worse, we’ve certainly had better, particularly recently. If you’d just sold Jan. 1st, you would have outperformed the vast majority.

That said, you can also see rallies. Those rallies got people to chase, and chances are that they lost money doing so.

It’s very easy in the heat of the moment to feel you missed something after a 10% rally that you didn’t fully participate in. There are systems that do chase trend, and that’s totally fine. Like I said at the start, there are lots of different ways to make money in markets. What I wouldn’t do is chase a trend without a system. That’s just gambling.

My system largely relies on growth prospects, among other things, and I try to slavishly listen to what it says. Right now, people are excited on the basis of China somewhat reopening and the Fed getting closer to a pivot. I’m certainly watching those things, but nothing has happened within my system to tell be to jump on board.

China reopening is a somewhat questionable stimulus, in my mind. Thus far, they’ve mostly been jawboning about what they could do. We’ve seen a lot of nations do that when they want to maximize impact while minimizing effort. Eventually, that fades.

Second, they’re largely an export economy. With their customers heading towards recession, for how long does their reopening have an effect?

Third, if they really do reopen fully and successfully, doesn’t that just export inflation to the rest of the world?

Speaking of inflation, investors are excited about inflation slowing, but they’re way ahead of what the Fed plans. That’s making the Fed’s job tougher, as the market has loosened financial conditions back to where they were back in August. The Fed says tighter for longer but the market has pushed back. Perhaps the market has pushed too far.

Again, there are lots of different ways to manage, and many of those ways can work. For myself, I know my system, I think it works well, and it tells me not to chase any of this. It’s more likely I’ll use this burst of bullishness to trim positions that have done well given unlikely assumptions the market has made.

Other systems may have different ideas of what they should do, here, and that’s perfectly fine. That said, I see no point in abandoning my system and rushing a different way simply because the market has been going up to start the year and there’s yet more newsy excitement out there. We’re not managing based on what the market did in the last two weeks, we’re managing for the months, quarters, and years ahead