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.I have expressed 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 delivering superior investment returns. 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.