Talk is Cheap, but Money Talks

Photo Credit: Inhabitat || What is wealth, but concentrated efforts from the past organized by a man?

I’ve written on this topic many times, and I summarized my thoughts in this piece, Understanding Investment Consensus. Journalists and investors are often cavalier regarding how the market is positioned versus a given issue. Just because journalists and bloggers talk about something that is a possible crisis, that does not mean that investors have acted on those opinions.

Think of our last two major crises, the Great Financial Crisis (2008) and the Dot-Com Bubble (2000). Were there many people warning about those events in advance? Yes, there were many who did so. Did institutional investors react to these correct predictions? No, they didn’t. Why?

First, institutional investors have been trained not to time the market. Thus they tune out what they view as noise. Second, indexing and pseudo-indexing dominate the markets. Pseudo-indexing is the asset managers who are benchmarked against the market as a whole. All of them hug the indexes on average. There are generally few asset managers that are willing to be unique.

Most of the market is passive investing when aggregated, which leaves more opportunity for those that are willing to take chances on a portfolio that is not index-like in the slightest.

There is a real advantage at present to managers who are willing to run value portfolios that are distinct — not like the indexes, and willing to tolerate a lot of deviation versus the indexes.