Value Library

The following is an excerpt from the ABC Perspective - January 2002 - Pg. 1

It isn't easy being a portfolio manager. People expect us to pick winners because we are supposedly well-educated, experienced, intelligent and "in-the-know."

We research securities. We make assumptions and projections. Then we select common stocks to insert in our portfolios. But sometimes things don't go according to Hoyle and our stock picks don't pan out. Some stocks languish and stick out like sore thumbs. In some cases we cling to these losers too long with the expectation that they will appreciate in price. Sometimes they do come back but in other cases they deteriorate further. Clients notice. They query the manager and start to grumble.

Upon being questioned the portfolio manager will explain his rationale for the original stock purchases and why he continues to hold the securities. With the explanations given some investors are satisfied and move on. Others aren't convinced and ultimately question their commitment to the portfolio manager. In some instances they decide to liquidate and leave the funds entirely. Clearly it is their prerogative. As an investment manager I would like to offer my comments.

Firstly, investment styles (value, growth, momentum, etc.) are very cyclical. They go in and out of investor fashion. It is during those out of fashion periods that all investment managers are open to severe criticism. No matter how successful a manager's past performance, investors have very short memories. Some will severely criticize the manager. They might label him a "has-been" and "completely out of touch". The criticism of Warren Buffett during the high technology bubble of 1999-early 2000 comes to mind as a perfect example.

But clever managers don't suddenly become stupid. The investment business, however, is fraught with innumerable investment cycles. A manager may be successful today with his style but the same erudite manager can be abruptly amiss when investment winds change course and a new investment style becomes the rage.

Commitment is important to both the investor and investment manager. The manager, I believe, must remain true to his advertised style. It is, after all, very difficult to be consistently successful by flip-flopping around investment styles. With investment managers under constant scrutiny the manager must be able to withstand the temporary criticism of being out of favour. This is no different from any professional athlete who might encounter a temporary slump.

The successful investor, too, must also remain committed. He must remember why he initially invested with the manager. If circumstances haven't changed but merely the cyclical environment has temporarily shifted, why should an investor abandon a respectable manager? Strangely enough, investors establish long-term relationships with lawyers, doctors, accountants and automobile mechanics. They rarely flip-flop and possess an extremely high level of commitment. Why should there be any difference with regard to investing?

There are many long-term benefits with investment commitment. The rewards are bountiful, I believe, for those who remain disciplined and patient.

Irwin A. Michael