Logic is not enough
In such a world, he says, it is not sufficient to be an entirely logical manager, because fundamentals are not the only thing at work.
“You have to be logical yes, but you also have to understand the game that is being played,” he said.
From a fund manager’s point of view, in order to win the game (which is how he describes the bull market) one needs to be fully immersed in it, but if one is fully immersed, eventually one gets “slapped in the face”.
His job, however, is not to win the game, but rather to ensure that his fund does not go down a lot and, as a result, he cannot immerse himself in the game.
“I have to be aware of the game but I have to do something different from it. For me the job is just to hang in there during the game. Then, when it changes I should be up because I have been prepared for it and other people should be down.”
Staying alive
The key, he says, is to stay alive long enough, while the game is on, to profit when it changes. Asked how he does that, he said it translates into not shorting in scale immediately because from his point of view, things could get worse before they turn and, also, to try to have a few longs that are relatively attractive, across the sectors.
“For example, one could be long Unilever and short Nestle. You can find stocks on a discounted cashflow basis that are not that far above where they should be. So, you go long those ones and then short those that are more egregiously valued. That should keep you alive because you have longs and shorts in the same sector.”
That is not to say it is easy. In fact, it is a very difficult position to take, especially as the latest game has been ongoing for seven years now, but, it might well be the only way to stay sane.
Another way to look at it is through the lens of musical chairs. It has been easy to stay in the game as long as central banks have been playing fast and loose with the supply of chairs, but if those chairs eventually are removed, in order to keep playing when the music stops, either you are going to have to be quicker than everyone else, or you can start looking for the chairs in the dark corners that may have been discarded and forgotten. Alternatively, you can buck the trend and bring your own chair and watch from the side-lines until a new game starts. But, what you can’t do is assume there will always be enough chairs for everyone.
