Value Library

The following is an excerpt from the ABC Perspective - July 2009 - Pg. 16

A Pick-Me-Up

Quite often a portfolio manager struggling in a difficult market will search relentlessly for a few new, extraordinarily-undervalued common stocks to rejuvenate a stale portfolio. These fresh selections are sometimes controversial in that they appear to bear somewhat more risk in a risk-averse economic environment. Nonetheless, these underrated and contrarian selections represent exceptional opportunities that might have been frequently overlooked in a skittish marketplace. I refer to them as “pick-me-ups.”

Pick-me-ups, in my opinion, are important for at least three reasons:

1) they tend to be rather contrarian and might have languished for a long period with investors considering the security to be inappropriate for uncertain times;

2) they offer excellent risk/reward potential largely due to investors’ general reluctance to review the shares;

3) a pick-me-up’s ultimate success becomes a meaningful psychological and confidence booster to a portfolio manager.

Simply put, by recalibrating an investment portfolio and by refreshing a stale bunch of holdings with a few appealing pick-me-ups, this action will not only improve investment performance but also should invigorate or embolden the portfolio manager. In short, aside from the obvious improvement of portfolio returns, the point to be made is that investment managers are, at the same time, both professional and very human. In consequence, an investment win in a rather morose market environment will often provide the manager with a new edge, boost or incremental confidence. A lift in a manager’s self-assurance in an all-pervasive risk-averse market will frequently encourage the manager to search for more extraordinary stock selections in a normally complacent setting.

Interestingly, most portfolio managers have experienced serious feast or famine performance streaks during their careers. These difficult periods are not only trying on the patient and loyal client, but also, they heap increasing pressures on the portfolio manager to perform. In consequence, the growing strain on the investment manager to turn around performance grows in crescendo, similar to a dog chasing his tail.

As difficult as it may be, the successful manager will try to block out the intensifying pressure and sense of urgency to diligently research new selections. The added incentive of making a personal comeback, by sticking to one’s stock picking disciplines, fuels the selection of two or three new favourites needed to regain a portfolio’s momentum. Ultimately with a few well-selected pick-me-ups the ensuing improved performance is not only inspiring to the manager but more importantly becomes a vital catalyst to the manager’s return to investment excellence.

Irwin A. Michael, CFA