Do you think LeBron James keeps track of how well he does in the third quarter of an NBA game? You know: points, rebounds, steals, etc.? Do you suppose anybody on the Miami Heat tracks that? Or the NBA itself?
Of course, there are NBA employees who gather that data for the entire length of a game. But have you ever seen a league table or newspaper box score that breaks individual stats by quarter? I haven’t. Maybe someone somewhere (probably involved with a fantasy basketball league) is keeping track. Good for them.
But out here in the real world, the shortest period of time worth tracking is a full game. As in, “LeBron James scores 42 as the Heat Rout the Minnesota Timberwolves.” It’s assumed that the 42 points reflect LeBron’s contribution for the whole game.
In short, there’s a lower limit to the length of time worth tracking in the NBA. And when it comes to not merely keeping score, but determining greatness, it’s not even one game. Wilt Chamberlain once scored 100 points in a regular NBA game – still the record.
But Wilt isn’t among the greatest players because of that. Wilt’s a basketball legend because after a 15 year career that ended in 1973, he remains, to this day, the NBA all-time leader in points-per-game and in rebounds-per-game. Or, in the abstract, Wilt produced high-quality performances over a long period of time.
Other measures of greatness also involve a minimum length of time. Players aren’t eligible for the Major League Baseball Hall of Fame unless they played in the major leagues for at least 10 years. One-year-wonders don’t qualify. And while baseball fans debate endlessly the worthiness of various eligible players, no one has ever questioned the length-of-service rule. If anything, ‘great’ players with 11- or 12-year-long careers are still regarded with some disdain, even though they are technically eligible for induction.
This all came to mind in early 2013 when I was contacted by a financial service startup that was holding contests among emerging money managers. The contests were designed to pit wannabe hedge-fund managers against each other to rack up the best absolute returns. The winners were promised seed funding of as much as $7 million. And how long were these contests going to last? Two months.
Now I’m all in favor of quantifiable measures of quality being taken into consideration over other factors, like Where You Went to School or Who Your Famous Daddy Is, but as they say on ESPN, “C’mon, man!”
Given the inherent volatility of stock returns, it’s essentially insane to think that a two-month (about 43 trading days) period of time is long enough to separate Joltin’ Joe from your Average Joe. Or more generically, separate skill from luck. Instead, try thinking in terms of years. Like three-year periods – the minimum for a Morningstar star rating. Or five years, but only if it included both halves of a business cycle – a standard requirement for institutions vetting professional money managers.
It’s a truism among professional investors that, ‘you have to hold through the periods where your strategy is out-of-favor.’ But that’s the wrong way to think of it. If LeBron missed four straight shots in the third quarter, would we say he’s in a slump? Of course not. He just missed four shots. He wasn’t drained of his talent by some unseen vampire.
If a money manager “loses” a lot of ground to her benchmark because she has three or five or even 10 down days in a row, it’s probably not because the strategy is ‘out-of-favor.’ It’s almost certainly because…wait for it…her strategy wasn’t designed to ‘win’ every day in the noise of the market.
Great basketball players aren’t great because they hit every shot. They’re great because they hit more than they miss and win more than they lose and do so over long periods of time. The same is true with money managers.
Excellence isn’t determined overnight. And sometime, excellence doesn’t even look like excellence. It looks boring or dull. It doesn’t look like a 100-point game. Or a buzzer-beater from half-court. Or eight steals in the third quarter. It looks like…LeBron James. So far, anyway.
On December 16, model holding LSI (LSI) received a friendly takeover offer from Avago Technologies (AVGO). Avago is offering $11.15 in cash. We are confident the deal will be consummated at the stated terms because:
1) Avago is a well-capitalized and credible semiconductor company; 2) The boards of directors of both companies have already approved the terms of the transaction; and 3) Avago believes the deal will be “significantly and immediately accretive to its earnings.
Consistent with our disciplined process, we will likely sell our LSI position before the next re-balancing in February 2014 and replace it with a 2% position chosen from our quantitative model.
Overall performance for the Crabtree Technology portfolio in December was again solid on an absolute basis but mixed on a relative one. The model rose 3.4% in the month, compared with a 3.4% gain for the S&P 500 (SPX).
Our internal benchmark, the Merrill Lynch Technology 100 (MLO) rose 5.9% in December. The most widely held technology ETF, the State Street Global Advisors’ Technology Select SPDR (XLK) rose 3.5%, including a dividend.
For the full year 2013, the portfolio was solid on both an absolute and relative basis:
Crabtree Technology model: +47.5%
Russell 2000: +38.8%
S&P 500: +32.4%
Please see the Crabtree Technology portfolio page on Covestor for a more complete picture of the model’s performance as well as important disclaimers.
DISCLAIMER: The investments discussed are held in client accounts as of December 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.