Is The Glass Half Full Or Half Empty?


I found a great quote at Zerohedge of all places which ties in exactly with how I have managed portfolios since I started managing portfolios. From Marc Harila;

What’s the difference between a pro and an amateur? Professionals look for what’s wrong with a setup. Amateurs only look for what’s right.

I don't think about people being pros or amateurs but the rest of is very important to understand regardless of whether you're a do it yourselfer or work in the business. Where the quote uses the word setup, I take that to be about shorter term trading, but for me the context is about the entire stock market cycle.

I am on the lookout for what can go wrong, not what can go right. Things go right most of the time, the stock market has an up year about 72% of the time. An advisory client or the typical person managing their own portfolio is going to make fewer behavioral mistakes as the market and their portfolio goes up. I'm pretty sure no client has called their adviser in a panic because the stock market was up 30 basis points on some given day.

Panic and bad decisions come from declines in markets, big declines. A big part of portfolio management is avoiding mistakes. Mistakes are more likely to occur under threat of emotion and emotion is more likely to occur when the market goes down a lot (repeated for emphasis).

In that light then, it makes sense to spend more time studying what can go wrong for markets, looking for what threatens the market as opposed to what can go right.

Pivoting, I found this post from The Whitecoat Investor about avoiding extreme portfolios. One example he gave of an extreme portfolio was 1% in gold mining stocks, 44% in gold and 55% in T-bills. While that is extreme, I think it is more of an intentional, extreme portfolio. While someone may not fully understand the drawbacks of this portfolio, hopefully they'd realize that if gold goes down a lot they'd have a problem. What I think would happen with this portfolio is someone saying "I didn't know gold could go down that much" as opposed to not realizing what they were vulnerable to.

I think an unintentionally extreme portfolio would be worse. I've seen rampant, unintentionally extreme portfolios twice; the tech wreck and then the financial crisis. If it is a problem now it is probably in tech again, more specifically web 2.0. If you own a bunch of funds in your portfolio, do the work needed to see how much exposure you have to the various sectors. If you're 35% tech versus the 25% that is in the S&P 500 and tech does indeed blow up then a 35% allocation would be problematic. I promise you that when the next broad market blow up happens there will be plenty of articles in the Wall Street Journal chronicling the extent to which so many people had way too much in whatever it is that causes the blow up and didn't know it. For what it is worth, most clients are underweight technology versus the S&P 500, 25% in one sector is really a lot.