frozen by the screen: a portfolio manager’s ailment

frozen by the screen

Every seasoned professional investor I’ve sat down and compared notes about the profession with has experienced this phenomenon.  Usually it happens when the market is declining and you’re underperforming–sometimes badly.  You turn on your computer or your trading machine to see what prices are doing.  Your stocks are doing poorly again.  But instead of either turning to another page or going back to work, you sit and watch the flow of trading in your stocks and worry.  You may be mesmerized or horrified.  You’re using up a lot of emotional energy.  You know this isn’t helpful, but you just sit and watch–and maybe perspire heavily.  You can’t tear your eyes away from the screen.

This isn’t good.  For one thing, you’re not doing anything productive.  You’re not thinking about how you can tweak your holdings to achieve even higher levels of outperformance.  In a deeper sense, though, this behavior is a sign that you’re either about to lose your confidence or have lost it already.  You’re focusing on failure, not success.

for professionals

This happens to every professional now and again.  It’s the equivalent of a hitter going up to the plate worrying about being hit by a hundred mile an hour fastball and breaking his ribs, rather than visualizing how he’s going to hit a double off an accomplished pitcher.  You’re setting yourself up for failure.And the cold reality is that if you can’t get into a positive frame of mind, then you may not be cut out for this line of work.

For a portfolio manager, there are several obvious steps to take to restore a positive mood:

1.  Turn off the price screen and don’t turn it back on.

2.  Take out your analysis of the stocks you hold that are performing the worst, rethink and rework your assumptions, and come to some conclusion.  The result will probably be that you believe the stock is as cheap as you thought.  Even if you spot some fatal flaw, you’ll have some reason other than fear for making a change.

3.  Rethink your portfolio structure and whether it’s still appropriate.

4.  Look for depressed stocks that you always wanted to own but thought they were too expensive.  Consider whether a market downdraft has made them more attractive.

5.  Look for long-term weak performers in your present portfolio (you know they must be there, because everyone has them).   They’re probably not going down much (because they never went up).  Think about using them as a source of funds for any new additions.

6.  You can always take some risk out of the portfolio by making it look more like the index.  In my case, however, every time I’d done this it’s been a mistake.

7.  If you’re going to do something stupid, like selling a perfectly good stock while its price is down, do it in a very small amount.

8.  If nothing else works, go to the gym  …or read a book.  Just don’t turn the screen back on.

Of course, there’s an underlying assumption I’m making–that what’s going on is a moment of mental weakness, a temporary loss of focus.  It’s also at least possible that your unconscious is telling you that you have deep fundamental flaws in your portfolio that you need to fix as fast as possible.  But if you know yourself well enough psychologically, you should be able to tell the difference.

for regular people investing their own money

Funnily enough, these are much harder cases to diagnose.  Good professional investors are highly trained in what is an often counter-intuitive way of thinking about the world.  So the pitfalls they encounter are usually well understood, because they’re the ones every other manager has encountered as he tries to master his craft.

For regular investors experiencing angst at declines in their holdings, I’d have three basic questions:

1.  Do you know how the companies whose stocks you hold earn their money?  Have you read quarterly/annual reports and 10Q/10K filings?  Have you formed an expectation about potential returns for each holding?  If you haven’t, you’re not investing, you’re buying lottery tickets.

2. Do you have an overall financial planning strategy?  Is the risk in the stocks you hold appropriate for your economic circumstances?

3.  Are you willing to devote the time needed to develop investing skills, or would you be better off finding a financial planner to help?  (Finding a competent adviser is a whole other can of worms, however.)

why am I writing this today?

My personal stock portfolio had been holding up relatively well during the correction–until yesterday.  I did end the day with two green lights on the screen, DKS (who knows why) and 1128:hk, where the market was closed while New York was falling sharply.  But my other stocks really got clunked.  That’s just life.   But I noticed that I was starting to stare at my screen in an unhealthy fashion.  So I ran for about a half-hour and read a couple of chapters in a book about web design. 

For what it’s worth, my take on the sharp reversal in my portfolio’s relative fortune signals that the correction has entered a new phase.  The tendency in downdrafts in the market is for investors to begin by selling stocks they don’t care much about.  As the correction progresses, the selling reaches closer and closer to what people consider their crown jewels.  If the decline ends in a mini-panic, even parts of core holdings get shown to the door.  I’m not saying this last happened yesterday, but I do think the correction took another step closer to completion.

finding a stock entry point: figuring the percentages


The decision to buy an individual stock, or an ETF or an index fund ,for that matter, is the product of a series of increasingly focused judgments.

The first is the investment plan that sets out an asset allocation among cash, bonds and stocks based on your goals and risk tolerances.

The second level is a comparison of the relative returns you judge are available to you from the different classes of liquid assets, namely, cash, bonds and stocks.  (At present, it seems to me the odds are tilted unusually strongly toward stocks.)

The main benefit of cash in a bank or a money market fund at the moment is that the funds are safeguarded; returns are miniscule, although capital loss is extremely unlikely.  The 10-year Treasury bond yields 3.2%, the 30-year 4.1%.  I find it hard to imagine that interest rates will fall further, creating capital gains for bondholders.  If anything, rates will begin rising in the coming year, producing capital losses.  Stocks?  The long-term average, which I regard as the default number, is around 10%.  I think the year-ahead potential is greater than this, but that’s another story.

The third judgment is whether you perceive a reward from deviating from a benchmark stock index–in the case of US investors, it’s typically the S&P 500–to take the extra risk of buying an individual stock.

figuring the percentages

first pass

Let’s say I decide to add equity exposure to my portfolio.  I figure that earnings on the S&P 500 can be $85 this year and $95 next.  I think the market can trade on 15x earnings, which would be an earnings yield of 6.6%.  That compares very favorably, I think, with the 3.2% interest yield on the 10-year Treasury.

If those numbers are reasonable–I think the earnings could be high and the multiple could be low–then the S&P offers 20% upside over the next half year or so.  Downside?  Le’s say that in the current period of market fear the index could drop another 10%.  I think that’s too much, but it allows me to make a point I think is important.  And when people get scared, who knows what their emotions will lead them to do?

Let’s also say that I think both outcomes, up 20% or down 10%, are equally likely and are the highest probability results.  This means I’m risking the loss of $1 in order to gain $2–2 to 1 odds.  This sounds ok but not fabulous.  Should I wait for better odds?

second pass

Suppose the market drops 5% from here.  Then the situation is 25% gain vs. 5% loss.  5 to 1! This looks much more attractive.  But…

third pass

I’m not the only participant in the market.  Others have pocket calculators and can make guesses about possible market outcomes.  In other words, everyone already knows the market is very attractive down 5% from here.  In all but the most panicked markets, there’ll be someone who says to himself that he’ll get a jump on the crowd by buying down 4%.  After all, a 24% gain (eight years of 10-year bond interest) vs. a 6% loss isn’t bad, either.  There may also be someone who not only thinks about the crowd but about the guy who intends to buy when the market falls 4%.  He may think that a 23% gain vs. a 7% loss, or 3-to-1, is acceptable and place limit orders to buy at 3% below the current market.


The reverse regularly happens when the odds favor selling.  In this case, astute sellers forgo the last few percentage points of theoretical upside to be assured of exiting their positions before a decline commences.

The same kind of calculation applies with individual stocks as with the index.  One difference, though:  the risk/reward ratio has to be higher, I think, than that of the index to justify the extra risk of buying an individual stock.

I’ve always found it harder to figure out the bottom of a trading range than the top.  This may partially be my bullish temperament.   But marking the bottom also requires a good understanding of how much risk the market attaches to the possibility of actually achieving, or breaking through, the top of the range.

In the current situation, for instance, the market may still think that the most likely year-end target for the S&P is 1250-1300.  But it clearly now wants to assign a higher risk to this outcome, as the break below 1100 (which had previously been a solid-looking floor) and the current search for support around 1050 show.  Part of the new anxiety comes from the slowing in the pace of growth in consumption in the US over the past month.  Part doubtless also comes from worry about the impact of a slowdown in Europe on corporate profits here.

Both concerns appear to me to be already overly discounted in today’s prices.  But the market, which is always the final arbiter, disagrees.

Three ways to buy and sell

A simple idea

This is a simple but, in my experience, often overlooked idea in investing.  Let’s put aside the reasons for buying and selling and simply assume that we have decided that we want to remove one holding from our portfolio and replace it with another and that action is not time-critical. There are three ways to do this.

A simultaneous buy and sell

The easiest and least risky (assuming that the securities are liquid) is to place simultaneous buy and sell orders.  This is what I think most people do on most occasions.  But it’s not the only tactic.

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