I had never driven to work before I joined Blue Elephant – I had always been a (somewhat) happy bus commuter. The bus gets a bad rap versus the train, but from where I lived it was a pretty simple commute. Now that I drive every day over the Tapan Zee Bridge to Irvington, I’ve become infatuated by the different types of rush-hour drivers. I mean, the trip takes me about 40 minutes with traffic, and I imagine that anyone else leaving around the same time as me from the same distance away would also find the trip took 40 minutes. This doesn’t stop some people from changing lanes constantly. What are they looking for? I mean, if the car in front of you stalls, I totally get it, but there is no magic lane that is going to bypass the traffic. I see three major types of drivers.
- The overaggressive lane changer – this is the driver looking for the magic lane, often angrily, going from 0 to 60 mph and back to zero over and over again, while really making no more headway than anyone else. Also the most likely to get pulled over or to get into an accident
- The opportunistic lane changer – the type that is happy to stay in their lane, but if there is an unusual gap in the traffic they will jump at the chance to make a change
- The “I love my lane” driver – some people, though few, are just happy in their lane. Maybe they’ve done the trip ten thousand times and realize the futility of the entire lane-changing operation. Maybe they’re afraid to change lanes. Either way, they’re not moving.
This year we’re off to a rocky start, with investors getting very nervous around global economic weakness, Greek/EU political problems returning, and a Fed that is threatening to (gulp) raise interest rates amidst all of the noise. Since I have a lot of time to think on my daily journey, I think that the way people drive is very similar to the way people invest and that when the markets start to get more difficult, it is important to choose the correct investment style for the volatility that lies ahead. What are these styles?
- The trader (overaggressive lane changer) – We all know someone who invests this way. They are the day-traders, the ones looking for the action. They love the market one day and hate it the next and they are happy to see the facts that suit whichever story fits their positions that day. Most often these investors are in higher risk trades that do well when the market goes up, but there are plenty of perma-bears in this category as well.
- The go-with-the-flow type (opportunistic lane changer) – This is an interesting style, where there is usually a well thought out theory behind their investment but they are willing to change that theory if a big enough gap in information is presented
- The passive investor (I love my lane) – Many investors believe in an overarching theory of markets. “Stocks always outperform in the long-term,” or “I believe emerging market equities are the future” are theories in this category. There is little that will make these investors change their views; they are in it for the long haul.
I don’t believe in the trader style of investing. It isn’t in my nature, and I think there are very few traders with a big enough edge in today’s electronic markets to capture market noise successfully. On the other hand, I think knowing when to switch from being a passive investor with a very long-term view and one who is willing to grab onto another theory when the facts change is the key to investment survival. At Blue Elephant, we try to combine the 2nd and 3rd type, by having an overarching thesis and constantly testing it, staying in our lane for long stretches but knowing that there are appropriate times to slide into a new lane.
The name of the game in 2015 is going to be survival. We are exiting a world where central banks can dampen volatility and inflate asset prices without risk. The Fed is done with QE and the ECB and Bank of Japan have announced massive programs that are broadly priced into markets. That doesn’t mean stocks are going straight down. In fact, with European yields near zero I have to wonder if there isn’t another wave of money coming into equities in the near future. My point is that all the investors who have successfully stayed in their lane over the last few years need to be aware that the world may be changing. At the same time, the go-with-the-flow types will need to be careful not to pounce on the wrong opportunity.
Interestingly, the US consumer is in relatively strong shape, having delevered since the crisis. Corporate and sovereign borrowers have levered up significantly, and I’d look for the trouble in those sectors. In our marketplace lending portfolio, we’ve seen no deterioration in performance and continue to believe that that a stream of high quality loans will outperform the broad markets this year.
We’re happy to keep an eye on the markets, leaving our investors to keep an eye on the road. Be careful – after 5 months of driving myself to work, I can tell you -- there are a lot of bad drivers out there.