"I am but a simple caveman trying to understand your human ways."
-- Phil Hartman, unfrozen caveman lawyer
Who am I to make comments about a professional money manager? I am but a simple Motley Fool analyst trying to understand why he does what he does.
The Wall Street Journal ran an article by E.S. Browning on Sept. 29, titled "Pressure Builds for a Professional Investor." That pro is Jon Brorson. I don't know him, but I can't say that I'd go about investing exactly the way he does. But then again, things on Main Street are much different than on Wall Street. (I'm using "Wall Street" to talk about institutional money management in general; Mr. Brorson is based in Chicago.) Still, I will share my thoughts with you -- although I am but a simple Motley Fool analyst.
David Bowie revisited
So what's making Mr. Brorson feel as though a weight is crushing him? Actually, I think there are five weights atop his shoulders.
The first one, I am sure, deals with incentives. Brorson comments on switching investment firms for more money and more independence. But the performance targets probably switched, as well. And from the account in the article, I can safely assume he's got quarterly numbers -- at a minimum -- to deal with. Heck, he seems to check his performance daily.
Next, we have the length of his day. Apparently, he wakes up around 4:50 a.m. and doesn't get home until late. On top of that, he remarks that he's been having trouble sleeping. To me, it seems his job has become all-consuming, and that can't be healthy or helpful. At some point, spending more time at work makes you less productive, because stress impairs decision-making skills.
He is constantly surrounded by noise. He talks about the analyst reports he plows through, how he's always on Bloomberg, regularly taking calls from analysts selling ideas, and forever keeping up with the latest news on CNBC. This sounds like information overload. Once that happens, it's hard to find the true signals in the noise.
In addition, he seems to depend on lots of outside sources. Of course, to some extent, we all get ideas from others. But Wall Street is a promotion machine and, as Chieftain Capital's Glenn Greenberg pointed out in this lecture (scroll halfway down to launch the video), you have to cut that out and depend on your own ideas. That's very Foolish.
The fourth thing I see is that Brorson seems to take a reactionary approach to the market. For example, he mentions reducing his positions in Phelps Dodge (NYSE:PD) and Boeing (NYSE:BA) in favor of defensive stocks like Coca-Cola (NYSE:KO). The reason was that the former were too reliant on a strong economy, while the latter is more "defensive." Frankly, that doesn't make much sense to me. But then again, my simple Motley Fool mind buys and sells based on whether a company is undervalued or overvalued by the market, not how the market might shift.
Here's another example of being reactionary. Brorson mentions selling Exxon Mobil (NYSE:XOM). The reason seemed to be because its stock price was falling and likely hurting his performance (remember those targets?). Why not make the decision based on Exxon Mobil's value and its expected returns? But again, that's just my simple Motley Fool mind talking. What do I know about the pressures of institutional money management?
Apparently not much, given this quote: "The goal . isn't to be right, it's to own winning stocks."
Really? That's perplexing to me. Why would I want to be checking which sectors are winning in order to rotate into them? That seems to be buying on the way up, with "the trend is your friend" type of thinking. It doesn't seem like I am going to pay a good price for an investment opportunity if I am buying what everyone else is buying.
Here's another reason I find that comment strange. What if your investment thesis is wrong and yet the stock goes up? Is that OK? Personally, I think that's dangerous. I would rather be right than own winning stocks. Because if I'm right more often than I'm wrong (meaning I have a good process), then my investments should be winners (meaning I should be able to generate good outcomes). You can't just rely on outcomes, even though that seems to be how Brorson gets paid.
Why I'll stay on Main Street
Look, I'll fully admit that I have no idea what it's like to manage billions of dollars of other people's money. But I will say that if it forced me to change the way I've had success investing so far, I wouldn't want to do it. I'd rather stay on Main Street than move to Wall Street. And here's why.
1. By not having short-term performance incentives, I am less constrained and can take a more long-term view. That way, I am not worried about my relative performance and can focus on my absolute performance. Over the past year, I've watched my investment in outdoor sporting goods retailer Cabela's (NYSE:CAB) go from my buying price of $20 to about $15 before moving up to $24. $20 was a good price, and I still think the company is undervalued today. But I never felt any pressure to sell because of the red I saw in my brokerage statements. Only on Main Street.
2. Although I love analyzing investments, I also love my life on Main Street.
3. Not being on Wall Street makes it easier to tune out the noise (it's much quieter on Main Street) and helps me think for myself to find the strongest signal. For example, I rated eBay (NASDAQ:EBAY) an Outperform in the Fool's new ratings service, CAPS, despite all of the pessimism on the Street over the Skype acquisition, price increases, and a lack of a growth catalyst.
4. On Main Street I can be market-agnostic, whereas on Wall Street it's all about the moves in the market. Therefore, I can be opportunistic instead of reactionary. I don't care which sectors are hot and which are not. I only care about what opportunities the market is offering.
5. Last and probably most important, on Main Street I can focus more on process than on outcomes. That's because it's not just about making money grow. I agree with Legg Mason's chief investment strategist, Michael Mauboussin (click here to launch a .pdf version of his article), that making good decisions is just as important as having good outcomes.
The Foolish bottom line
Helping the individual investor on Main Street is the charter of The Motley Fool. The Wall Street Journal article shows that it's not easy being in the thick of things on Wall Street -- in fact, it may even be a detriment. I remember Warren Buffett saying that being in Omaha, a city about as Main Street as you can get, was an advantage. So if my simple Motley Fool mind can successfully manage my portfolio from Main Street, you can, too.
Are you ready to take on Wall Street from Main Street? Then sign up today to be a part of the CAPS community and to rate the stocks in your portfolio.
eBay is a Motley Fool Stock Advisor selection, and Coca-Cola is a Motley Fool Inside Value pick. Looking for bargains in the stock market? So is the Inside Value team. To see where lead analyst Philip Durell is finding the best ones, click here to take a free trial and find out how he's beating the market.
Retail editor and Inside Value team member David Meier owns shares of Cabela's, but does not own shares in any of the other companies mentioned. You can view his profile here. The Fool takes its disclosure policy very seriously.
