What money can’t buy – what brains frequently don’t

contribute – is a precious, non-consensus view of the future.

– Jim Grant, Grant’s Interest Rate Observer, 11/14/14


One of the worst things you can say about a person in my business is, “He’s a retail investor.” The term “retail investor” is code for someone who is always leaning the wrong way, who is constantly bedeviled by greed or fear, who chases returns and hot managers, whose timing entering and exiting markets is always dead wrong, and so on. It’s even been suggested that a material portion of the recent “inequality” that has grown up in the US has resulted from larger and more sophisticated investors significantly outperforming retail investors, widening an already-significant gap in net wealth.(1)

But the fact is, at certain points in the market cycle, we all become retail investors. At the very bottom of Bear Markets, for example, fear grips even the largest, most experienced investors – and their advisors. How much smart money was piling into the market in early 2009?

More important, today, as we near the tipsy top of a long Bull Market, what do we observe, even in the portfolios of supposedly experienced, sophisticated investors? We observe the following, and you might ask yourself (there’s a scorecard below) how many of these observations precisely fit your shoe size:

  1. You’ve come to believe that hedge funds are essentially a fraud on the investing public. They’re over-sized, over-priced, over-rated and have no role to play in a sensible portfolio, as the largest investor in America recently determined.(2)
  1. If hedge funds are a swindle, global macro hedge funds are obviously for idiots. Even the best of them is in negative territory YTD  while the equity markets continue to soar.
  1. Active management is deader than last year’s Thanksgiving turkey.(3)
  1. You suffer from an undiagnosed case of TINA – There Is No Alternative to buying equities because the yields on fixed income securities are actually below the inflation rate.
  1. To the extent you’re not buying equities, the only things worth considering are high-yielding assets like junk bonds, bank loans and MLPs.

Scorecard. Okay, give yourself two points for each statement that describes your current investment philosophy. Here’s where you rank:

* 2 points. I’m giving you a pass, but only reluctantly.

* 4 points. You’re a pre-retail investor. Take your meds.

* 6 points. You’re a retail investor in good standing. Don’t make any large financial commitments.

* 8 points. You’re a retail investor on steroids. It’s too late for you.

* 10 points. Shirtsleeves-to-shirtsleeves in one generation.


(1) Many observers have made this point, usually in passing because it seems so obvious. See, e.g., Wojciech Kopczuk and Allison Schrager, “The Inequality Illusion,” Foreign Policy, 5/15/14.

(2) CalPERS. Large, yes, and largely brain-dead. But even CalPERS only eliminated its specific hedge fund allocation. It continues to own billions of dollars in hedge funds that are categorized in other portfolio sectors.

(3) I’ve already argued this point. See The Bull Market Eats Its Young, post of 10/16/14.

Next up: The ICOM

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Please note that this post is intended to provide interested persons with an insight on the capital markets and is not intended to promote any manager or firm, nor does it intend to advertise their performance. All opinions expressed are those of Gregory Curtis and do not necessarily represent the views of Greycourt & Co., Inc., the wealth management firm with which he is associated. The information in this report is not intended to address the needs of any particular investor.

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