Investing in hedged equity strategies is a bit like running with the bulls: investors love the adrenaline rush of the Read More
President & CEO Dan Kraninger reflects on a volatile 2nd quarter and provides insight moving forward.
Since the end of the quarter, I’ve been asked many times about my thoughts on Brexit. What will happen to interest rates? The euro? Stocks? Global growth? Basically, these questions are subtitles under one central theme, “where is the risk and how do we avoid it.” With this post, I thought I would try to explain how we view risk and what it means to be tactical. Let me start with a story . . .
Here is the scenario — you just landed your dream job, Director of Player Evaluation and Acquisition for a Major League Baseball team. When you arrive, you have reports on 5,000 prospects on your desk. Each report encompasses hundreds of individual statistics on each player’s past results and future potential. The draft is 30 days away. Over the course of the draft, you will select 40 of those 5,000 players to lead your team to future success… What would you do? What do you think other teams would do? What would an experienced General Manager do? Now to switch gears a bit, what do you think an engineer from Google would do with the same problem?
A similar challenge is examined in the book and subsequent 2011 Oscar® nominated movie, Moneyball, which starred Brad Pitt. The central premise of Moneyball is that the collective wisdom of baseball insiders over the past century is subjective and flawed. Moneyball tells the true story of the Oakland A’s General Manager, Billy Beane, hiring a young ivy league graduate to mathematically determine which player statistics better predict team wins than the conventional approaches used for decades. Together they built a winning team and revolutionized the sport (and business) of baseball by assembling a team with players based on obscure factors such as on-base percentage and slugging percentage.
The A’s eliminated intuition and relied on logic to produce wins. Not an easy transition. Scouts were respected employees for baseball teams for over a century and for the first time their value was been questioned. (Look at the fortune and folly of draft prospects from the four major sports over the years and one wonders what took so long!).
We do the same thing at NorthCoast. We rely on data and discipline to produce results. Every day we produce a number to score the stock market’s attractiveness. We use 40 inputs – some are valuation based (how expensive is market), some are technical (are prices improving) some are economic (are retail sales increasing), some are sentiment (are producers optimistic about their future business climate). We too eliminate intuition, and this discipline I believe is why our company has prospered for more than two decades.
5% and 10% declines are frequent, unpredictable and often temporary as they shake out loose hands. These declines whether recent — Brexit (June, 2016) / China (January, 2016) or old — Long Term Capital (August, 1998) / Iraqi Freedom (January, 2003) teach the same lesson. Markets that are reasonably priced in a decent economic environment with positive business surveys present good buying opportunities. Markets like 2000 or 2008 teach a different lesson — markets that are expensive in a declining economic environment with negative business surveys are more likely to enter into a bear market. And this is what our tactical strategies are built to try and avoid.
So whenever the next Brexit, avian flu, Russian invasion, or bank blow-up hits, if you really want to show off your understanding of how your money is being managed, instead of asking what me or my colleagues what we think of the situation, ask if anything has changed in our Navigator score.