The Portfolio Manager Strategy Cycle

I get a kick out of watching how the cycle of emotions never changes over time.  If there’s one guarantee in the markets it is that people respond to the same environments with the same cyclical thought process.  And it’s funny to see how some portfolio managers think they’re immune to it.  As if only the guy on the street is vulnerable to the rollercoaster ride of emotions.  But nothing could be further from the truth.

Although the financial crisis might feel like it was a lifetime ago, the cycle of various strategic approaches to this market is fresh on my mind.  We all know the cycle of emotions.  You tend to feel euphoric at the peak, panicked at the trough and generally confused all the way inbetween.  Don’t worry – portfolio managers are no better.  They just express their emotions in varying degrees of active portfolio management with fancier sounding ways to express the rollercoaster ride they’re on.

So it’s been fun to watch how often we used to hear about certain approaches in recent years:

  • In 2009 buy and hold died.
  • Almost everyone became a trader at the trough of the crisis.
  • Then it was “buy the dips, sell the rips”.
  • Then it was all about high quality dividend names.
  • Then it was a “stock pickers market”.
  • Now buy and hold is all you hear about from anyone.
  • “Stocks for the long run!”
  • Then long only via defensive names will be the only game in town.
  • Then buy and hold will die.
  • Then short strategies dominate.
  • Then tactical approaches win, hedge funds are your only savior, etc, etc.

Rinse, wash and repeat….Don’t worry, portfolio managers are just like everyone else.  They just express their emotions in different & fancier money losing terminology.

pm_strategy_cycle

Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • Karl

    What is the emotion re: Nikkei right now?

  • http://orcamgroup.com Cullen Roche

    Drunk.

  • LVG

    Yep, I can’t tell you how many times I’ve seen Jeremy Seigel on TV in recent weeks.

  • Notagain

    excellent and accurate !!

  • Dan

    Really funny. It’s a kind of confirmation bias. People are simply averse to saying, “I don’t know.” Thanks Cullen.

  • coolhead

    Impressive. We are all humans.

  • http://pragcap Michael Schofield

    I appreciate your bringing some humor to an often dry subject CR. You could print that chart on posters and t-shirts to help monetize your site :)…soon we shall test the ability of Govt’s and CB’s to extend the peak, maybe this time is different enough and there is more to come. I suppose this will be like other trends, it will work until it doesn’t.

  • LRM

    Love that roller-coaster. Nice summary of those emotions !!

  • Barak

    i’m missing the “this time it’s different” and “it’s a new paradigm/economy” phase.

  • http://www.conventionalwisdumb.com Conventional Wisdumb

    +1

    and he never, ever says anything remotely different from anything he has ever said before. The networks should just save money and use stock film for his appearances just like that Al Qaeda training camp film they used to use over and over post 9/11 :)

  • http://alephblog.com David Merkel

    Cullen, I have my own version of this that you might enjoy, on page 10 of this:

    http://alephblog.com/wp-content/uploads/2010/11/Efficient%20Markets%20versus%20Adptive%20Markets.pdf

  • http://orcamgroup.com Cullen Roche

    Nice. Thanks David!

  • Tradeking13

    So are you implying that we’re near the cycle top?

  • http://www.ivtrades.com ivtrades

    hahaha….spot on buddy. I have been thinking and saying the same thing since like forever. We are all human…hence we are all in the same emotional boat.

  • Steve

    So where are we today??? Perhaps: It’s a stock pickers market?

    Any thoughts Cullen or anyone else?

  • Montresor

    See an overlay of this year’s market versus 1987, where similar overconfidence in equities led to a single day collapse of over 20%:

    http://stockmarketadvantage.com/alarming-chart-of-the-stock-markets-of-1987-and-2012-2013/

  • midas2

    If the market didn’t oscillate how would the lucky make money?

  • Mark

    So Brad is there some reordering of the combination of labels and graphs that means we get to make money, and which reflects a sophisticated view rather than what actually happens IRL. for example swapping “buy and hold is back” with “buy and hold is dead” would seem super effective