I am a baseball fan. I came of age during the waning days of the Mickey Mantle era. These guys were tough. Mickey Mantle, a nearly flawless player, was hampered by so many injuries from playing and partying so hard that he hit the field taped from neck to toes. Teams were mostly home grown, players came up through the farm system and while there was the occasional trade that was the exception, rather than the rule. Then came free agency, then Moneyball and now the use of data to select players with certain attributes has made another shift.
The newest shift is well, eh, ‘the shift’. It’s a defensive alignment or positioning based on the probability of where the hitter will most likely hit the ball. I have seen over the last several years this “strategy”take on greater and greater acceptance. If you ever followed baseball in the past, you might look out onto the field between third base and second base and expect to see the shortstop patrolling the area. In the enabled shift, the shortstop might be somewhere to the right of second base, leaving a hole between second and short wide enough to park the Oasis of the Seas. It’s all very scientific.
But, like most things, it doesn’t always work. During a recent Yankees vs. Red Sox game, maybe one of the best rivalries in all of sports, the Yankees put the shift on one of the Red Sox players and before you can say Jackie Robinson, the hitter placed the ball in the very vacant area between third and second base, driving in two runs. Had the shift not been implemented, this routine ground ball would have, barring an error, ended in an out and preventing the runs from scoring. The new technology of baseball failed, or the implementer of the strategy failed in reading the data.
In the world of investing, the same strategies happen constantly. You make decisions based on what you see, read, believe and rely on your human decision to take them to a successful conclusion—increasing their wealth. Take something as simple and basic as a mutual fund, a professionally managed basket of securities. Whatever you read about mutual funds typically begins with the idea of a long-term investment. Fine. Move down the page a little more and you will see what the fund’s purpose is—large value, small growth, foreign mid-caps. Also fine.
But now look at the reality by checking out the turnover rate. The turnover rate tells you what percentage of the portfolio is traded over the course of the year. The higher the number, the more “active”the manager is. So how is a high turnover long-term investing? If you look inside the actual holdings of most mutual funds, you will see other asset classes besides the stated purpose of the fund. You might see a Large Cap Value fund holding Small Cap stocks, growth, international, etc. What? Oh yeah, in the small print of the prospectus you received and read (right?), it tells you that the managers have the ability to move into other types of investments at their discretion.
As an investor in say, a diversified group of eight mutual funds, if you look at the reality, you might find that you own Microsoft eight times, Apple eight times, Exxon eight times. Even though your desire was to diversify in a responsible number of different securities, the managers are playing the shift and buying the same securities. That’s because it is their performance numbers they care about—you come second (or third). Retail fund managers don’t care how many times they turn over the portfolio, buying and selling as the spirit moves them, thereby creating unnecessary trading costs and potentially adverse tax consequences. They don’t have to pay your IRS bill either. They read the data, sift it through their subjective strainer and push and pull your money into whatever position they desire—including derivatives and costly hedging strategies.
Your long-term investment strategy for building your wealth is in the hands of mostly well-meaning people who have a priority list different from yours, the investor. The tools they use cannot take into account the enormous number of variables that impact the markets daily. Just fits all their criteria for purchase today, doesn’t mean that a tornado, rise in commodity prices, labor problem or change in technology won’t render the stock a complete bomb.
Data is great, but there can be a wide disparity between your expectations and the outcomes. Just watching those two runs cross the plate was enough to convince me.
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