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By Ray V. Ryan, CFA
 Success in managing investment portfolios is derived from many factors, most of which are beyond the control of investors. Clearly, education and preparation provide a stable foundation upon which to develop an effective strategy. A little knowledge goes a long way. However, despite all the homework one might do, the markets have consistently humbled the most intelligent of professionals. Timing, good or bad, plays a part. As with games of chance, a certain amount of luck also goes a long way.
Markets have been described as the collective wisdom of its participants. Buy stocks (or bonds or commodities) when they are rising in value, in other words; sell when they are falling. Yet, countless academic pieces have demonstrated that the greatest profits are obtained when one “goes against the crowd.” Bookstore shelves are cluttered with volumes offering strategies on how to consistently beat the market. Many investors seek the Holy Grail of investing—the magic formula or system that, for some reason, provides exceptionally high returns with seemingly little risk. If it were that simple, the Efficient Markets Hypothesis would argue that all investors would exploit the same winning strategy until the returns were eventually whittled down. Investing is just not that easy, however.
Markets, economies, financial systems—the playing field of investing, if you will, is constantly evolving. Markets are fluid and dynamic. Therefore, there is only limited value in extrapolating the past onto the present or into the future. Historical data are relevant, to be sure, but they are not “the be all and end all”. Economists like to measure correlations between different variables or assets. The public has a bad habit of interpreting past correlations as causal. In other words, investing involves the great unknown—the future—and success in investing is often a function of how well one prognosticates.
Extending the sports metaphor, the role of an investment advisor is similar to that of a coach or the manager of a ball club. Let’s use baseball as an example, especially since baseball, like the market, is overloaded with available statistics. The manager of a club assesses the strengths and weaknesses of the upcoming opponent. A certain hitter, for example, might have had historical success against a member of the pitching staff. The opponent might have exhibited a certain tendency to attempt specific plays in specific situations. Injuries to members of either club might factor into the formulation of line-ups. All of these factors, and many more, are considered when developing a game plan.
The game plan is presented to the players whose role is to then execute the strategy on the field. Once a game begins, of course, many additional variables become relevant—weather, wind, sunlight, temperature, field conditions and humidity. Ultimately, the ball could bounce in a peculiar manner, or a key player could simply have an off day. Players might make errors on routine ground balls or heroically catch a ball headed over the fence. Sometimes, the game plan proves to be not well suited for the opponent. On occasion, everything works flawlessly.
The better managers realize there are nine innings to each ball game and 162 games in each season. One bad inning does not spell doom. A series of bad ball games, however, can lead to a downward spiral of misery with streaks, or trends, gathering momentum. Managers are paid to make adjustments. Believing the original game plan to be sound, a manager could determine that adjustments should be minor. Depending on the circumstances, managers might also decide to literally start from scratch. A manager must assimilate an overwhelming amount of information and interpret from that which is pertinent. A good manager consults others and collects feedback. In the end, a manager must rely on his/her knowledge, experience, and instincts. Finally, a manager must make decisions.
Making investment decisions on behalf of clients is a professionally and personally rewarding occupation. The service allows clients to worry less about the future, particularly during these turbulent, uncertain times. We have found that advisors are more effective if they have a clearer understanding of the objectives of each client. Instead of managing to “beat the market,” per se, we seek to exceed the expectations of each client, whatever they might be. The goal is to strike a balance between the objectives of the client and their relative tolerance for risk against the opportunities and risks available among various asset classes. It’s important to balance satisfying current and future financial needs from the portfolios managed. Dialogue between advisor and client is the cornerstone of a mutually beneficial relationship.
Investment strategies, like game plans, should be well researched, collectively reviewed and long term in orientation. Ample research acknowledges that success most often occurs when one approaches investing as a marathon. Markets have historically offered “hot” areas that attract a great deal of attention. For one reason or another, these opportunities have proven temporary in nature. A long-term strategy based on sound fundamentals and good diversification works more often than not. Overreacting to one negative inning could prove deleterious over the long run. Short-term fluctuations in the markets do require adjustments, but abandoning a strategy should only follow a complete reassessment of one’s objectives or market fundamentals.
Ray Ryan is a principal of Patten and Patten, Inc. and has served as a Portfolio Manager since joining the firm in June 1999. Prior to joining Patten & Patten, he worked in several areas of the capital markets, including investment banking, for SunTrust Equitable Securities Corporation, the successor company to Equitable Securities Corporation in Nashville, Tennessee. Prior to his tenure with SunTrust Equitable, Ryan worked in capital markets, particularly institutional fixed-income sales & trading, for Lehman Brothers. Ray Ryan is a CFA Charterholder and an instructor with a leading CFA preparatory organization. He is a member of the American Economic Association, the American Finance Association and has served as the President of the CFA Society of Chattanooga. He earned a Bachelor’s degree in Economics from Princeton University in 1989.
The views of Ray Ryan do not necessarily reflect those of Patten and Patten, Inc. or those of the publishers of Sterling Southeast.
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