Wednesday, March 14, 2012

I Can See the Future

The last ten years were terrible for stocks and thus it is no surprise that plenty of experts have come out of the woodwork to pronounce the death of buy-and-hold.  I don't know how long this long-term rangebound market will hold, but one day the markets will trend strongly again for decades (secular bull market) without a 50% drop every few years.  When that happens, buy-and-hold will experience a renaissance as the gold standard in stock strategies since that will provide the highest returns while absolute return styles like mine will fall by the wayside. 



My fear is when that time comes again, my conservative style will be lambasted for leaving too much money on the table.  Others will ridicule me for fighting the last war.  But truthfully that's secondary.  Primarily, how would I be able to handle my own doubts?  Accepting subpar returns relative to peers is fine if you are vindicated every few years by a vicious bear that only leaves you standing.  What if that doesn't happen for twenty years?  Thirty?  Nothing says a secular bear or bull market needs to have a certain length.  How long will it take before I start to question myself, that my strategy was nothing more than a product of this current environment: a decade long secular bear market.  If I started this fund in 1997, would I still be starting an absolute return fund?  Or would I be preaching the greatness of buying and holding?

I don't think I will know the answer until I get to that point, but the following comforts me: all quantifiable strategies should never be thought of as having a starting or end point.  If you will, think of any strategy as starting in the year 0 and ending in the year infinity.  We as human beings are plunked down randomly on any 30-50 year stretch on that timeline.  Since we have no control over which of those years, we have to assume we could be occupying any of it.  Thus, what should that strategy look like over the entire timeline?  Should it look like great success some times and utter ruin in others?  Or do I rather a less volatile strategy, neither matching the peaks nor troughs of its cousins?  This is ultimately my reasoning behind such a conservative fund.  Unfortunately, I know for a fact there will be a point in time when such strategies will be extremely unpopular.  Will I be able to read this and refortify myself or will I rationalize these statements as the awkward ramblings of a naive young man before leveraging myself up to my eyeballs?