Yesterday I had lunch with an experienced, successful financial advisor. We touched on a number of topics, but started to share our ideas about the markets. This discussion was a great example of different Investor Types, which you can learn more about in our Lessons.
The advisor I was speaking with tends to be a bit more shorter-term focused, willing to take shorter-term tactical shifts in the model portfolios his team manages. Based on his team’s short-term belief that we are in a bear market with significant headwinds (recession, earnings revisions downward, central bank liquidity coming out of the market), their model portfolios currently hold significant amounts of cash to try to protect on the downside for their clients. They also use a quantitative model to help determine when and where to get in and out of the market.
This investment philosophy and execution process is based on a shorter-term mindset. There is nothing wrong with this approach, regardless if they are right or wrong. This type of investor is just a shorter-term investor with a quantitative model to help with decision-making.
Throughout my career, I have performed investment manager due diligence on these types of strategies and allocated capital to various tactical strategies so I know how to categorize this strategy and know the pros and cons of this type of strategy.
I personally tend to have a longer-term focus, waiting for fatter pitches to allocate capital. I prefer to wait for the market to come to me, not chase the market and other shorter-term traders. I think taking swings at every little pitch/move in the market is difficult to do, particularly due to so much “noise” there is in the market. The little mistakes from all of these moves can be detrimental over time and just not worth it to me.
As a longer-term investor, there are pros and cons to that approach as well. The biggest con is willing to withstand short-term pain for longer-term gain. Another perceived con is that it’s a boring approach and nothing happens all that often with portfolio allocation shifts. Frankly, after seeing all of the various tactical traders I’ve covered from large and small firms, the exciting tactical approaches don’t often deliver. Again, there is nothing wrong with different investment approaches or styles, you just need to understand that there are different approaches.
As the advisor and I continued the discussion, my mind shifted to how shorter-term traders/investors are currently tripping over themselves, trying to figure out where the market bottom is, whether we are in a recession or not, what the Wall Street strategist S&P 500 year end targets are (which they all moved down after the market declined), how much cash to raise for an “obvious” slowdown in earnings, how much liquidity is coming out of the market, and so on and so on. This is where there can be a potential arbitrage of longer-term patient investors taking advantage of shorter-term tactical traders.
Remember, this is not advice, I am just pointing out the difference between investor types in real-time. Think about all of the short-term traders that have become increasingly defensive, selling their equity positions and resulting in a market selloff. This means there may be a lot of cash on the sidelines to be put back into the market at some point. Traders will often ignore the long-term fundamentals of a company and would sell the stock of a company rather than experiencing short-term downside prices pressures. That’s a legit strategy and nothing wrong with it.
Remember the lesson on what moves financial markets. As a knowledgeable long-term investor, I know that markets will sell off when short-term traders get nervous on the markets and sell their risk positions. Long-term patient investors just have to wait for this environment to happen and try to take advantage.
In this current market environment, with equity prices down and bond yields higher, there are investment opportunities for longer-term investors to consider taking advantage of. Shorter-term investors with a negative short-term view will remain defensive and out of the market, but when sunnier skies arrive, those short-term traders will become more bullish and get back in to the markets. For those longer-term investors that look through the short-term weakness and a lot of noise and confusion, longer-term investors adding to their investments may be rewarded when shorter-term investors get back into the market.
So as I finished my discussion with the advisor, in my mind as a longer-term investor, I may be taking advantage of their short-term bearish positioning and adding to areas of the market that they will become excited and more bullish on in the future. To me, that is much easier than trying to time the market for every up and down and every reason contemplated. It is a clear reminder to me that understanding the lessons on Investor Types and What Moves Financial Markets are key concepts for all investors to understand.
In conclusion, you need to figure out if you are a short-term trader or a long-term investor. There isn’t any one right way, both strategies can be successful. It’s up to you to determine what works best for you, for you to remain disciplined with your strategy, and not to get emotional about it. That can help you to become more successful over time.