The Essence of Investment Management

For better or worse, we receive a plethora of commentary and information on the markets each week. Some of it we seek out from managers and fund companies we know, and some of it just finds its way into our inboxes. Either way we can usually glean a nugget or two of wisdom before we hit the ‘Delete’ key.

Federated Investors, who manage more than $360 billion, wrote a nice piece last week noting the likelihood of a correction is elevated and suggested prescriptions for preparing. We aren’t sure if a correction in stocks is imminent or not, but we always believe managing risk comes first.

Federated’s Director of Managed Risk notes, “. . .there are three near-certainties that [experienced long-term investors] have come to rely on: 1) markets never go in just one direction for an extended period; 2) the beginning of new tightening cycles by the Federal Reserve (Fed) never go without disruptions; and 3) something unexpected always happens.” 

We could not agree more, and this is why we build portfolios that focus on limiting downside risk as we seek to capture appropriate upside in rising markets, and plot a smoother path for our investors.

Federated goes on, “So how should investors prepare? We prefer the adage, “Stay invested but protected.” Research shows that 76% of the worst days and 67% of the best days occur when the market is declining. In other words, trying to time when to be in and when to be out is a tricky and typically unrewarding endeavor. The better option is to have in place a strategy that seeks to limit the potential downside risk while still seeking to participate on the upside.” [emphasis added]

It is not often that we find $360 billion asset managers so soundly endorsing our style. Anyone who pays attention might notice that most asset managers and mutual fund companies do not fare too well in the downside protection business and are routinely trounced trying to chase market indexes rather than managing client returns the way that is suggested here.

The final paragraph from Federated may as well be chapter and verse from the KilterHowling playbook:

“The message: it’s arguably more important to lessen the sting of downdrafts than it is to fully participate in updrafts. That’s a central tenet of alternative and managed-risk strategies, but it certainly is not some newfangled concept. As we’ve noted before, putting loss avoidance first has been at the heart of modern investing since its founding. As the late Benjamin Graham, considered by many to be the father of value investing, said in the groundbreaking “Graham and Dodd’s Security Analysis’’ book in 1934, “The essence of investment management is the management of risks, not the management of returns.” Want a more contemporary view? There is this from Benjamin Graham protégé Warren Buffett: “The first rule of investing is don’t lose money; the second rule is don’t forget Rule No. 1.” [emphasis added]