Disclaimer: Dan owns UTF, DVM, and RNP in his Covestor Core model.
The below text is licensed to Covestor Ltd. (“Covestor”), by Dan Plettner. Such text may be disseminated only by Covestor. Dan Plettner invests and receives income for securities research, including “buy-side” research. Dan licenses his own real time trading data to Covestor Ltd. (“Covestor”). Covestor is a Registered Investment Advisor that uses Dan Plettner’s data to create the Core, Long Short Opportunistic, Tax Advantaged Income, and Taxable Income models for its clients. Dan’s words should not be misconstrued as investment advice.
September 30, 2010: I underperformed in September. Such is reality. Mr. Market grades each of us in both the short term and the long term. The short term matters because the long term is the aggregate of all short terms. When I look at my short term grades, I need to be objective and critical of myself. Big heads never learn anything.
A month ago in contemplating signs of a confused marketplace, I observed that trading ranges never last forever. I had generally arrived during the August 23rd to August 27th market week at heavy cash position. My assessment of the markets risk and reward parameters tempered me to maintain a significantly underinvested position. I think that Mr. Market has told me in September not that I was too mindful of the possibility of a sharp move, rather that I failed to anticipate that, at least in the very near term, the sharp move was to be upward.
I sold FGF in September on what the market took to be good news, which was on the lower end of what I perceived as plausible outcomes. I added DVM to my other Cohen & Steers holdings (UTF and RNP) here, all subjects of a recent distribution increase.
I have more favored bottom-up ideas, but investedness is an issue because I continue to lack strong conviction in the market overall. Was early September a head-fake to tempt in the last window dressers and risk-lovers, or the first inning of a major market rally? There are both upside and downside risks, and well-merited rationales for each. Stocks are generally cheap relative to alternatives, and they may be under-owned. At the same time, economic policy makers have used their primary ammunition and seem to be focused presently on rhetoric. Is rhetoric the policy makers’ most effective tool to keep people from shunning stocks? And, would the prospective returns that might justify the risk profile of equities be overtaxed next year?
The goal for my account licensed to Covestor’s “Core” model is “to provide significant risk-adjusted total return outperformance versus the S&P 500”. I am generally happy with the volatility measures and reported Beta of 0.28 in the Covestor risk report. I do not have to hug any benchmark and nor dress any windows because nobody can fire me from managing my own account. The most recent performance report is what it is, frustrating. Frustration is no cause to forsake objectivity. I think manufacturing conviction is a stupid game, which I’ll let the professional money managers play without me.
If the market keeps moving higher in October, I will almost certainly underperform, and look wrong to have insufficient conviction to be fully, or more aggressively invested. I very well may look bad if this rally proves to have the legs we all hope and want it to have. I prefer the probability of looking bad to the hazard of investing absent consideration for my objective conviction level.
On a more personal note, I enjoyed the Covestor webinar. Since leaving Wall Street, I’ve loved the personal autonomy. My speech was never so liberated, even when communicating with Financial Advisors. I will continue to make myself available to Covestor for any follow up questions.
