As I have
previously, one of the keys to delivering superior investment returns is to know when one should be part of the herd and when not to be -- and if one is wrongly positioned relative to that herd, not to be eaten alive.
I have referred to Acorn Fund founder Ralph Wanger's thoughtful words on this subject on
, and they bear repeating this morning:
Zebras have the same problem as institutional portfolio managers. First, both seek profits. For portfolio managers, above-average performance; for zebras, fresh grass. Secondly, both dislike risk. Portfolio managers can get fired; zebras can get eaten by lions. Third, both move in herds. They look alike, think alike and stick close together.If you are a zebra, and live in a herd, the key decision you have to make is where to stand in relation to the rest of the herd. When you think that conditions are safe, the outside of the herd is the best, for there the grass is fresh, while the middle sees only grass which is half-eaten or trampled down. The aggressive zebras, on the outside of the herd, eat much better. On the other hand -- or other hoof -- there comes a time when lions approach. The outside zebras end up as lion lunch, and the skinny zebras in the middle of the pack may eat less well but they are still alive.
that my fundamental concerns are multiple and hold negative implications for corporate profit and economic growth. With these headwinds and a weakened consumer, I don't envision a self-sustaining economic cycle through 2010-2011. Nevertheless, I recognize that my concerns have been put aside by most market participants who appear to be placing their emphasis on the value of corporate cost-cutting, which has improved the outlook for the short-term profits cycle, and are benefiting from a surge of liquidity into the markets that has put a curse on cash.
That said, from a tactical standpoint, risk-control can be almost as important as being positioned properly when it comes to
. If one has not lost too much capital, even if wrongly positioned, an investment manager can be well-positioned when he gets back in sync with the markets.
For me, I remain in a modest net short position based on a view that a number of nontraditional headwinds will begin to assert themselves sooner than later. I am a practical money manager, and I try to control risk properly, so I plan to expand my short profile if two conditions are met:
There are renewed signs that my baseline expectation for a disappointing 2010 economy is rising in probability.
I see some dissipation in the strong price momentum of the U.S. stock market.
While we have recently seen evidence of weakening economic activity in housing, durable goods and in the jobs market, we have not yet seen a break in the strength of the U.S. stock market.
So, for now, I act like Ralph Wanger's zebras that are not in the middle of the herd but that are looking for grass by cautiously moving toward the outside of the herd.
Doug Kass writes daily for
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At the time of publication, Kass and/or his funds had no positions in the stocks mentioned, although holdings can change at any time.
Doug Kass is the general partner Seabreeze Partners Long/Short LP and Seabreeze Partners Long/Short Offshore LP. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.