When I graduated from college and entered the work force, I knew there were a couple of things that I would need in a career: I would need to be constantly challenged and I would need to be constantly learning. Without those, I would get bored and lose interest.
Fortunately I came across investment management and quickly became captivated. The analysis of securities and markets was inherently challenging, but even more so since prices kept changing. I immediately set off to learn everything I could about the profession.
The good news is that I still harbor the same enthusiasm for the exercise of investing and have become even more optimistic about the potential for technology to facilitate interesting and new types of analysis. For the intellectually curious, it really is like being a kid in a candy shop!
Well it would be anyway, if there were a payback for doing quality analysis. Unfortunately, as I described in the market overview [here], markets have effectively become “hijacked” by central banks. An important consequence of their aggressive interventions has been that prices have come to resemble the outcome of central planning more closely than the result of free markets.
As I’ve argued many times, the single most important consequence of securities prices being artificially inflated is that they present an ongoing risk of a significant collapse down to, or beyond, their intrinsic values. While monetary policy can certainly maintain the charade for some period of time, as we have seen, it is virtually impossible to maintain an unnatural state of affairs indefinitely. This reality casts a pall of ever-present danger to any investment consideration.
Another consequence which rarely gets mentioned, however, but one that certainly affects me personally is that policy driven markets are boring; they simply aren’t intellectually challenging. The notion of hanging on every word that gets uttered by a Fed governor or parsing Fed minutes for minuscule changes in language strikes me as something akin to watching soap operas. It may be entertaining, and it may even provide some superficial, short term benefits, but it does nothing to improve things longer term.
This state of affairs is especially frustrating for someone like me who became so enamored of the investment business because of the intellectual challenge. Even more important than my individual sentiment, however, is the implication for the entire investment services industry. So many smart people have been rendered almost completely helpless to accomplish anything socially useful with their skills in the presence of these centrally planned interest rates.
If these conditions were to continue for very much longer, they would present an unpleasant list of options. As I also mentioned in the market overview for the first quarter, however, I think there are good reasons to believe that some opportunities will be emerging for engaged active managers who can take long term positions.
If and when that happens, it will be fun to apply the slew of cheap data, new resources and creative analytical tools to inefficiently priced securities. Further, new tools to build and share knowledge and fresh thinking about organizational structures promise to re-define what relatively small, focused research groups are able to accomplish.
I continue to believe that the investment services industry is ripe for fundamental reform and improvement. Further, the tools and capabilities for such reform are over-abundant, if anything. It seems to me long overdue that investors should start benefitting from the same scale of improvement that technology has already delivered to almost every other industry. While it is often natural for people to resist change, sometimes change is for the better!
Thanks for your interest and take care!
David Robertson, CFA
CEO, Portfolio Manager