David Moenning

About the Author David Moenning

David Moenning is a the Chief Investment Officer at Heritage Capital, which focuses on active risk management of the U.S. stock market. Dave is also the proprietor of StateoftheMarkets.com, which provides free and subscription-based portfolio services. Dave began his investment career in 1980 and has been an independent money manager since 1987. Thus, Dave has been live on the firing line and investing for a living for more than 25 years.

The Market Continues To Be In A Consolidation Phase

On a personal note, let me begin this morning’s missive by saying that France is one of my favorite places on the planet. And while my wife and I are not “city people,” Paris is always on our short list of vacation stops each year. As such, our hearts and prayers go out to the people of France.

Turning to the markets, the question of the day is if the fear of slowing global growth trumps the additional QE and economic stimulus that is expected to come from the ECB, Japan, and China.

Cutting to the chase, this question has been the driver of the market action for much, if not all, of 2015. The trend has been clear as one minute traders are in a tizzy about the outlook for global growth. And the next, well, they are reminded that there continues to be a steady flow of freshly printed euros and yen looking for a home. And by now, every trader worth their salt knows that when the QE cash is flowing, they need to be buying the dips.

Thus, if one steps back and removes the emotion from the terrorist attack, the “retail wreck,” the ongoing dive in oil and key industrial metals, and the worries over global growth, the plan forward would appear to be simple for the trader types – “buy the dips and sell the rips.”

S&P 500 – Daily

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So, with prices currently trending lower, the key to the near-term action will be to try and determine when traders and their fancy computers are going to flip the switch and go the other way for a while.

I guess the bottom line here is that this market has been range-bound for an exceptionally long period of time and hasn’t made any progress in over a year. But since the bears haven’t been able to get anything going to the downside for more than a couple weeks at a time, we will conclude that the market continues to be in a consolidation phase.

What Does It Mean To Investors?

This back and forth, up and down market environment has certainly presented challenges to anyone attempting to be tactical in their approach to the markets. In fact, tactical managers across the board have been struggling mightily since the beginning of 2014.

However, it is critical to note that tactical management is merely one investing approach or methodology. Other methodologies include passive indexing, strategic allocation, factor-based equity selection, target date, risk parity, global macro, value investing, employing alternatives, etc. In other words, there are many ways to approach the game of investing.

The Problem…

The problem is that too many investors (individual and professionals alike) tend to focus on just one thing (i.e. one methodology, strategy, or manager). This is usually an emotional response to what has or hasn’t worked most recently in an investor’s/advisor’s portfolio.

For example, after the brutal bear market of 2008, a great many financial advisors decided to embrace tactical strategies. And who could blame them? With traditional asset allocation approaches having been beaten to death twice in a nine-year span, adding strategies to client portfolios that could potentially preserve capital during bear markets certainly makes sense.

But, the key is the very same tactical strategies and managers that performed well in the bears of 2000-02 and 2008, had struggled prior to the technology bubble bursting and the credit crisis. Oh, and a great many of these manager/strategies have stunk up the joint since 2009.

In case you think I’m picking only on the tactical crowd, it is important to remember that other methodologies have struggled mightily at times. Remember 2012? At that time, a strategic allocation approach was referred to as “diworsification.” Oh, and then there are the bear markets of 2000 and 2008 – how’d that passive approach feel then?

Unfortunately, what most investors don’t seem to understand is that ALL methodologies, ALL strategies, and ALL managers struggle from time to time!

Yet a great many investors and a disturbing number of advisors tend to flee a struggling methodology/strategy/manager whenever it underperforms. They then begin the search for something better. I.E. something that would have worked well when their approach didn’t.

In short, this is called “chasing the hot dot,” “performance chasing,” and/or “strategy hopping.” And the bottom line is that buying high (i.e. moving into what has been working well recently) and selling low (moving out of what is underperforming) is not a recipe for success. Am I right?

When speaking to advisors, I use Warren Buffett as the poster child for my point. Most everyone will agree that Buffett and his sidekick Charlie Munger are probably the greatest investors of our generation. But, if one studies the performance of Berkshire Hathaway (NYSE: BRK.A) they will find that The Oracle of Omaha has indeed struggled and/or underperformed the market at times.

Anybody remember what Buffett said about the technology craze in the late 1990’s? In short, he suggested that technology didn’t make sense in his approach and that he was skipping the whole thing. At the time, the thinking was “the old bird had lost it” and that Buffett was done. But sure enough, Buffett turned out to be right and after underperforming for a while, BRK.A soon returned to form.

Don’t look now fans, but Buffett is struggling in 2015. If my math is correct, BRK.A is sporting a loss of more than -12% year-to-date. Ouch.

Berkshire Hathaway (NYSE: BRK.A) – Monthly

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To make this point come alive, compare the long-term (monthly) chart of Berkshire Hathaway (NYSE: BRK.A) above to that of the S&P 500 below.

S&P 500 – Monthly

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My key points this morning are as follows:

  • All strategies/managers/methodologies struggle/underperform from time to time
  • Changing strategies/managers/methodologies during a period of underperformance doesn’t work
  • There is no manager/strategy/methodology that works in all environments

What’s The Answer?

After 28 years of managing other people’s money, it has become clear that there is no silver bullet in our business. There is no one best strategy, approach, manager, or methodology. No, as the saying goes, every dog has its day. In my experience, the best answer is to properly diversify your portfolio across methodologies (passive, strategic, tactical, equity selection, alts, etc.), strategies, and managers.

By the way, it is the “properly” part of the equation that gets tricky! Simply throwing together a bunch of managers and strategies doesn’t cut it. In short, you’ve got to understand what drives the alpha of a strategy and then more importantly, what type of environment will cause the manager/strategy to underperform!

So, while it may sound strange coming from a manager who espouses a risk-managed approach to investing, I think we need to, as Justin Timberlake might say bring Buy-and-Hold Back!

No, I’m not saying investors should close their eyes and employ a passive approach (although passive indexing should be a portion of a portfolio!). I’m simply saying that investors should first properly diversify their portfolios using multiple methodologies, multiple strategies, multiple managers, and multiple time frames, and then “buy and hold their portfolio” — for years at a time.

At my firm, we call this approach MPD™, which stands for Modern Portfolio Diversification™ — and I am preaching this approach to anyone and everyone that is willing listen these days. After all, what good is 28 years of experience/mistakes if other folks can’t benefit from them?

Have a great day and “Vive la France!”



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