This column originally appeared on Real Money Pro at 8:07 a.m. EDT on May 2.
NEW YORK ( Real Money) --
"We must base our asset allocation not on the probabilities of choosing the right allocation but on the consequences of choosing the wrong allocation."Barton Biggs is a former creative writing major at Yale University, a former Morgan Stanley head strategist and research director -- he was responsible for the formation of the investment management business at Morgan Stanley -- author of Hedgehogging (my personal favorite book on the hedge fund industry) and founder of hedge fund Traxis Partners. Barton is an iconic figure, similar to Peter Lynch, Lee Cooperman, George Soros, Stanley Druckenmiller and Jim Chanos. But unlike Omega's Lee Cooperman and ex-Fidelity's Peter Lynch, whose strength is (and was) going belly to belly with company managements in an intense bottom-up approach, Soros Management's George Soros and Duquesne's Stanley Druckenmiller, whose wheelhouse is speculating in foreign exchange and interest rates, and Kynikos' James Chanos, whose strength is on the short side, Barton's turf is in macroeconomic investing and in asset- and geographic-allocation strategy. Barton is incredibly smart, his investment knowledge base is broad, and he doesn't suffer fools gladly. He can be daring in market view and aggressive in portfolio structure, but he has learned over the years to be disciplined in controlling risk and respectful of Mr. Market. I have routinely communicated with Barton over the years, and he is nice enough to send me his irregular commentary about the investment turf. That commentary is usually a combination of investment philosophy and a view of the markets rooted in macroeconomic investing. His most recent essay, "It's Never Easy," crossed my desk last week, and I want to summarize his comments, as they represent true pearls of wisdom.
-- Jack Bogle
- "Good information, thoughtful analysis, quick but not impulsive reactions, and knowledge of the historic interaction between companies, sectors, countries, and asset classes under similar circumstances in the past are all important ingredients in getting the legendary 'it' right that we all strive so desperately for."
There are no relationships or equations that always work. Quantitatively based solutions and asset-allocation equations invariably fail as they are designed to capture what would have worked in the previous cycle whereas the next one remains a riddle wrapped in an enigma. The successful macro investor must be some magical mixture of an acute analyst, an investment scholar, a listener, a historian, a river boat gambler, and be a voracious reader.Reading is crucial. Charlie Munger, a great investor and a very sagacious old guy, said it best: 'I have said that in my whole life, I have known no wise person, over a broad subject matter who didn't read all the time -- none, zero. Now I know all kinds of shrewd people who by staying within a narrow area do very well without reading. But investment is a broad area. So if you think you're going to be good at it and not read all the time you have a different idea than I do.'"
The investment process is only half the battle. The other weighty component is struggling with yourself, and immunizing yourself from the psychological effects of the swings of markets, career risk, the pressure of benchmarks, competition, and the loneliness of the long distance runner."
- "I've come to believe a personal investment diary is a step in the right direction in coping with these pressures, in getting to know yourself and improving your investment behavior."
- "As I reflect on this crisis period so stuffed with opportunity but also so full of pain and terror, I am struck with how hard it is to be an investor and a fiduciary."
- "The history of the world is one of progress, and as a congenital optimist, I believe in equities. Fundamentally, in the long run, you want to be an owner, not a lender. However, you always have to bear in mind that this time truly may be different as Reinhart and Rogoff so eloquently preach. Remember the 1930s, Japan in the late 1990s, and then, of course, as Rogoff said once with a sly smile, there is that period of human history known as 'The Dark Ages and it lasted three hundred years.'"
- "Mr. Market is a manic depressive with huge mood swings, and you should bet against him, not with him, particularly when he is raving."
- "As investors, we also always have to be aware of our innate and very human tendency to be fighting the last war. We forget that Mr. Market is an ingenious sadist, and that he delights in torturing us in different ways."
- "Buffett, a man, like me, who believes in America and the Tooth Fairy, presents the dilemma best. It's as though you are in business with a partner who has a bi-polar personality. When your partner is deeply distressed, depressed, and in a dark mood and offers to sell his share of the business at a huge discount, you should buy it. When he is ebullient and optimistic and wants to buy your share from you at an exorbitant premium, you should oblige him. As usual, Buffett makes it sound easier than it is because measuring the level of intensity of the mood swings of your bipolar partner is far from an exact science."
- "Fifty some years ago, Sir Alec Cairncross doodled it best:
A trend is a trend is a trend
But the question is, will it bend?
Will it alter its course
Through some unforeseen force
And come to a premature end?
- "Nations, institutions, and individuals always have had and still have a powerful tendency to prepare themselves to fight the last war."
What's the moral of this story? Know thyself and know thy foibles. Study the history of your emotions and your actions."
- "At the extreme moments of fear and greed, the power of the daily price momentum and the mood and passions of 'the crowd' are tremendously important psychological influences on you. It takes a strong, self-confident, emotionally mature person to stand firm against disdain, mockery, and repudiation when the market itself seems to be absolutely confirming that you are both mad and wrong."
- "Also, be obsessive in making sure your facts are right and that you haven't missed or misunderstood something. Beware of committing to mechanistic investing rules such as stop-loss limits or other formulas. Work very hard to better understand how you as an investor react to both prosperity and adversity, and particularly to the market's manic swings, both euphoric and traumatic. Keep an investment diary and re-read it from time to time but particularly at moments when there is tremendous exuberance and also panic. We are in a very emotional business, and any wisdom we can extract from our own experience is very valuable."
- "Understanding the effect of emotion on your actions has never been more important than it is now. In the midst of this great financial and economic crisis that grips the world, Central Banks are printing money in one form or another. This makes our investment world even more prone to bubbles and panics than it has been in the past. Either plague can kill you."