Monday, July 5, 2010

The Problem With Portfolio Managers

I have over the years worked with many portfolio managers and I have attended the investment committees of several money management firms – IC/PM for short. Guess what I have learned from them? Nothing. Yes, that is because they are all the same – they all fear something. They fear the markets are about to collapse and yet they fear not to be invested. That is because they fear the markets may advance without them on board. In order to defend against a falling market they all own some gold and they all over-diversify. I recall Warren Buffett saying that "Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing."

Now there are three ways to protect against a falling market – you can reduce and go to cash, You can remain long and place an inverse (or short) ETF into the portfolio – or you can seek out long position that will rise against a falling market AND also rise should the markets also advance.

I think the better option is to seek out a asset that will advance without regard to the current market conditions. This special asset will soften a corrective period and because you are for the most part long – should the markets advance – your in the game

Our chart is displaying a long position of the Natural Gas ETF (HNU) plotted above the short inverse S&P/TSX60 bear ETF (HXD). Note the high price correlation – both are displaying recent price advances – but if the broader stock indices should recover we will lose on the HXD and what is more probable – still enjoy an advance in the HNU

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