Long live market strategists!

I am always amazed at the uncanny ability of market pundits and financial journalists alike, to state the obvious whilst sounding like they just conveyed some groundbreaking news!. Over the last weeks or so a number of said types have littered television networks and investment newsletters with the following mantra:

“It’s a stock picker´s market”

As opposed of what, begs the question?. When pressed a little further, such “luminaries” will venture that given the uncertainty in capital markets, debt and equity alike, it pays to be picky in security selection. Notwithstanding the fact that we are navigating unusual uncertain times, I for one cannot think of a time when a selective approach would not be of use.

Not so for many “market strategy” professionals it seems!. Reading a little further into this collective´s new idea “du jour” would suggest that, absent a volatile scenario such as today´s, “investing” without much concern for individual securities in portfolio composition would be just fine. As a matter of fact numerous professionals have built (and unsurprisingly also buried) entire careers riding on the back of trends both cyclical and secular ones. In all fairness, there is nothing inherently wrong with this, just as long as the investing professional (and his hapless clients) understands the fragile foundation of this approach.

History suggests that luck can account for a significant portion of investment performance as was the case with buyers of the Nifty-Fifty growth stocks of the 1960,s (for a while) BUT given the mean-reverting nature of stock returns, a focus on riding the trend is surely a recipe for an eventual calamity. As always, Warren Buffet put it best with the following observation of investor differences in a bull market:

“Just as a rising tide lifts all boats, it s when the tide goes out that we shall see who´s been swimming naked”.

Sure, individual stock selection requires painstaking research, a thorough understanding of business and sector dynamics and above all an innate level of conviction to stand by one´s opinions. Joining the ranks of the “strategic asset allocators” or the “indexers” on the other hand, is not just clearly less strenuous but psychologically much more comforting. As John Maynard Keynes so brilliantly put it:

"Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally. ...

Investing, like most other productive endeavors tends to reward effort and quality of input in almost linear proportion. Put in terms that an economist would understand, there really is no free lunch in this game. Be that as it may, it astounds me to hear otherwise well-educated, travelled and reasonable individuals commend the virtues of trend following, asset allocation driven tactics, over the proven fruit s of discerning bottom-up security valuation and limited diversification.

And yet, for those of us who refuse to hand over hard-earned dough to trend-seeking, crowd -pleasing asset “gatherers” , there is reason for celebration. Without these folks opportunities to transact at attractive entry and exit prices would indeed be much more scarce.

Long live market strategists!