Antagonism In Portfolio Positions: A Clinical Study
Antagonistic behavior in all situations is an action that seeks a disproportionately greater reaction in order to escalate a situation to a resolution. At it's essence, antagonistic behavior is a response to emotional pain. Hurt people seek to hurt people. Antagonistic behavior as it relates to portfolio management is an often overlooked component of structuring and a modifying a portfolio of investments over the long-term. Of course, antagonism as it relates to a financial instrument comes in the form of a loss of capital that at the same time causes an erosion in the underlying thesis for remaining invested. The thesis often times remains identical as the point of initial investment. However, the erosion of the thesis is a symptom of persistent antagonism seeking a greater reaction from the investor. That greater reaction comes in the form of varying emotional stages that eventually completely alter the framework of an investment due to the pain of persistent antagonism emotionally exhausting the investor while seeking to escalate the situation to a resolution. Of course, labels of investment behavior will often times dictate how one reacts to antagonism. If you are, for example, a trend follower, antagonistic behavior won't be labeled as such until a technical breach takes place that invalidates the trend. If you are, for example, a value investor, antagonistic behavior is initially thought of as an opportunity to increase a position. Antagonism, for a value investor, only enters the picture when a pain threshold has been breached that alters his or her perception. As long as the antagonistic behavior can be defined within a system of labeling the antagonism as falling within a statistical framework for acceptable results then the behavior can be ignored. Once the system of labeling no longer applies due to the extent of the losses, antagonistic portfolio behavior is very suddenly thrust onto the consciousness of an investor causing a greater reaction, typically escalating into a prompt exit regardless of the underlying fundamentals or deviation from the initial thesis. The only thing that has changed is that the antagonism no longer is confined within a definable framework. It can be argued then that labeling oneself is detrimental as it only inhibits the ability to judge antagonism. In other words, labels of growth, value, trend follower etc. are only a means of accepting antagonism as being a necessary component within the framework of the investment. Antagonistic behavior within a portfolio should then be judged as what it is from the outset. Whenever a portfolio position is moving against an investor, it must be seen as an action that seeks to create a disproportionately greater reaction from...
When Contrarian Theory Fails
Every single day in the markets somebody attempts to make a contrarian statement in one form or another in order to exercise their right to intellectual superiority. Of course, in the markets, more than perhaps anywhere else, there is a definite reward for contrarian prowess. After all, the markets don't simply hand out money with no effort. Current market conditions aside, which would have had your average 12 year olds favorite online resources outperforming most any fund manager, contrarianism is the foundation of every story you have ever heard about investors harpooning the legendary whale in what turns out to be the trade of a lifetime. What happens when contrarianism fails, however? In other words, what happens when what is obvious is obviously right and it ends up rewarding all parties involved? I have argued in the past that the dynamic involved in rewarding all market participants in a heavily imbalanced consensus opinion is essentially the equivalent of the markets internal functioning mechanism breaking. Once broken, it allows for trends that are both powerful and unreasonable to a significant degree. Perhaps the one trade in the current market that is obvious in nearly everyone's eye is going long interest rates/short long dated government bonds. Everyone knows that inflation exists. Everyone knows that fiscal stimulus has massive inflationary ramifications. Everyone sees that yields are breaking out. The contrarian crowd among us has been loud in proclaiming that they know how this story ends, expecting some type of expungement of short exposure before the trend resumes. But it's not happening. The bond market can barely muster the energy for a moderate consolidation before the trend resumes back down. All the meanwhile, all of Wall Street is short bonds/long rates in one way or another. The internal mechanism of the markets that is built on fooling the greatest number of individuals is in the process of being overwhelmed by the fundamental data. The internal market mechanism that is underlying efficient market pricing dynamics is crumbling. What are the ramifications? A meteoric rise in rates that neglects to take into account any semblance of contrarian feelings, intellectual gesticulation or consensus data. A move to 4% on the 10 year is within reach. And what is obvious becomes obviously right. _______________________________________________________________________________ From time to time, I email individual company research, commentary and excerpts from my monthly investor letter to those who are interested. If you would like to receive future emails, please write me at mail@T11Capital.com Disclaimer This website is for informational purposes only and does not constitute a complete description of our investment advisory services. No information contained on this website constitutes investment advice....
Four Sectors That Actually Offer A Risk/Reward Opportunity To Investors
As we move onto the full on trade war chapter of our current novel, it's important to realize where the risk is in the current market environment. The ubiquitous dance of optimism very often hides the underlying risk investors are facing. This circumstance is no different. It can be said with a better than coin flip degree of certainty that the current economic environment is healthy in more ways than one. It can also be said that a market pullback can occur without any tangible interference in the economic machine that is currently spinning. A market pullback of severe consequence will likely be systemic in nature, relying on easily exploitable inefficiencies that are currently taking place in what has become a largely trend following approach to asset allocation masked as something more sophisticated. A majority of technology names are fraught with risk having coaxed nearly every asset manager to believe they have to keep exposure if they want to retain employment. Large cap financials also seem susceptible as they have become the "I have exposure to the markets but I don't have the guts to invest in tech" trade. Actual opportunity does exist, however, regardless of your stance with respect to the current condition of the market or economy. In no particular order: Property casualty insurance names have caught a tailwind as they face a number of positive fundamental factors that buoy their income statements. Private equity names are taking on a completely transformed business model to a great degree, taking the place of investment banks like Goldman that have mutated into god knows what over the past several years. KKR continues to be my favorite name in the space, acting like it is closer to a beginning of a powerful uptrend rather than any conceivable end. Specialty finance companies, whether select fintech names or mortgage servicing companies are transforming finance in a very deliberate manner. In the case of mortgage servicing, during the first half of the decade investors realized the profit potential of the business model of essentially becoming a government sponsored debt collector, until the very same government decided to step in because the companies were growing too fast. The government has stepped back greatly with a virtual dismantling of the CFPB. The power of their earnings model will be realized in the years to come. Single family residential REITs are attractive. There is not another sector of the market that is positively correlated to interest rates (as interest rates rise less individuals can afford homes, forcing them to rent); positively correlated to most any economic condition that doesn't involve a skyrocketing unemployment rate; has vasts...