Zeno’s Paradox

I once wrote that a good “bond manager” should metaphorically be composed of 1/3 mathematician, 1/3 economist and 1/3 horse trader. I still stand by that, although I would extend it now to the entire investment arena, especially after experiencing several years of “unconstrained” asset management. Surprisingly though, upon reflection, I find that personally I was never really an “A+ student” at any of the 3 but good enough at each to provide consistent long term alpha and above average profits for clients. In math, for instance, I was a 720 SAT guy but certainly nowhere near 800 status. In economics, I never got beyond Samuelson and an introductory MBA class at UCLA Anderson, but was self-educated enough to have forecast and ridden the secular bond bull market beginning in 1981, and fortunate enough – though “addled” – to have predicted the housing crisis, as well as named and described the “New Normal” that would follow. Horse trader? Well that’s an even more subjective assessment but I can remember being a rather mediocre fraternity poker player. You could usually bluff me out of a big pot, and these days in the market I find myself turning right sometimes when I should be going left. Whatever. B+, A-, B is how I would grade myself but the returns and the relative alpha compared to contemporaries proved to be the real scorecard, and I’m happy with the result, acknowledging of course that some in the “classroom” I worked and work with at PIMCO and Janus earned Summa Cum Laude status and more themselves.

But back to the 1/3 math thing. It’s there that I find the average lay and even many professional investors still thinking and managing assets at the grade school level. The childlike “teeter totter” principle, for instance which couldn’t be simpler in its visualization of bond prices going up when interest rates go down, produces foggy-eyed reactions from a majority of non-professionals, and from a few supposed experts as well. And too, the concept of longer maturities inducing more risk for bond holders seems to stump many. Heaven forbid the introduction of the more refined concepts of duration and forward yield curves as well as the extension into stocks with the addition of an equity “risk premium” and how it might be calculated. “Forget about the math,” many investors really seem to say – “let’s stick to the old Will Rogers adage, ‘If a stock is going to go up – buy it. If it ain’t going up – don’t buy it’!”