One thing I learned about being a portfolio manager who is often in first or last place relative to his peers, is it’s usually not a good idea to tout performance, especially before the market cycle is complete.
Considering absolute return investors are required to refrain from speculating during periods of overvaluation, one should expect periods of significant relative underperformance in every market cycle. Staying focused on full-cycle performance is important — touting or judging performance before a complete cycle is premature and can result in lost credibility.
Speaking of judging performance before a complete cycle (in this case the credit, monetary, and economic cycles), the following was on CNBC today.
Steve Liesman: Bernanke is generally upbeat about the Fed’s ability to exit from easy monetary policies, saying its critics have been wrong in the past.
Bernanke: So far so good. You know, it wasn’t too long ago when people on shows like this were saying we were going to be having hyperinflation and huge stock market bubbles, and dollar collapse, and all kinds of terrible things to come, but in fact, it’s gone pretty smoothly. The Fed is in the process of exiting from easy money, the economy is doing pretty well, the unemployment rate is 4.5%, inflation is close to the Fed’s target. All those things are on track.
I’m reminded of Bernanke’s comments near the peak of the housing bubble when he was asked what he thought the worst case scenario would be if home prices declined substantially.
Bernanke: Well, I guess I don’t buy your premise. It’s a pretty unlikely possibility. We’ve never had a decline in house prices on a nationwide basis…I don’t think it’s going to drive the economy too far from its full employment path.
Whether you’re a central banker or portfolio manager, I believe it’s very important to know where you are in the credit, economic, profit, and market cycles. Making the assumption current conditions will continue indefinitely and cycles will remain incomplete carries considerable risk.
In my opinion, a better time for Bernanke to tout performance is after rates and the Fed’s balance sheet normalize, or after the current monetary cycle is complete. Once emergency monetary policies are removed and free markets return, I believe we’ll be in a better position to not only judge the effectiveness of the Fed’s actions this cycle, but investors as well. Until the current cycle is complete, judging a central banker or portfolio manager’s 1, 3, 5, and even 7 year performance seems inconclusive (only includes the upside of the cycle).