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Strategy vs logistics
I am a fan of history and if you dabble in military history for long enough you may come across a quote attributed to General Omar Bradley: “Amateurs talk strategy, professionals talk logistics”. And indeed, Napoleon’s failed invasion of Russia just like the failed Nazi invasion of the same country can be attributed to a lack of logistical planning. With the Russians following a burnt earth strategy, simply withdrawing from the invasion forces, and leaving behind a wasteland without food or proper transport armies could simply not be supported in their advance. Who knows how World War II would have ended, had Hitler followed the advice of his generals in late 1941 to dig in and replenish his troops with fuel, food, weapons, and ammunition instead of pushing for Moscow when that city was a mere 100 miles away?
In the investment world, it is a common complaint that people don’t talk about strategy and strategic asset allocation enough, which is true, but it is also an unfortunate reality that too often little to no thought is given to the logistics needed to sustain a strategy over time.
Take for instance a private investor who saves for retirement. The portfolio is designed to fit this investor’s risk profile and achieve the required objective of providing enough of a nest egg to deliver enough cash flow in retirement. Then, something like the pandemic happens and the value of the portfolio is hammered in a relatively short time to an extreme event. All too often, the best thing advisers can do in such a situation of short-term volatility is to remind the investor to stay the course and not get too distracted. That’s like Napoleon telling his troops to keep on pushing toward Moscow even though it is winter because eventually, it will get warmer again. It doesn’t help because by the time it gets warmer you might be dead.
Or imagine a fund manager with a value approach who invests in a company because it is cheap and has a solid margin of safety. Amongst value investors they say a stock that is down 75% is a stock that dropped 50%, then you bought it because it was cheap, and it dropped another 50%. Now the fund manager is down 50% on the investment and the question is whether to stick to the value strategy and buy some more to increase profits as the stock recovers or to hold the stock or sell it and cut losses. John Hussman of Hussman Strategic Growth Fund is an example of what can happen when you stick to your strategy, but don’t provide your investors with the logistics to stick with you over the long haul. Eventually, your investors will abandon you and your fund.
I recently read a paper about a phenomenon the authors call consumer spinning. The basic idea is that consumers buy a house that has a sweetener deal associated with it to make it easier to buy the house in the beginning. For example, this could be reduced interest rates on a mortgage for the first couple of years. Before the financial crisis of 2008, many homebuyers expected to flip the house at a profit before the higher interest rates kicked in. But when house prices stopped going up, they were suddenly unable to flip the house at a profit and were stuck with a mortgage with high interest rates. Many of them then started to replace the mortgage with another more aggressive mortgage (e.g. a mortgage based on a lower level of equity in the house). Over time, consumers lost track of their original goal of buying a house and just went into a spiral of ever riskier mortgages in order to make up for past losses. The lack of logistics to sustain the original mortgage, in the long run, led to a debt trap.
In one of my books, I wrote an entire chapter about my own mistakes of being too focused on strategy and the long-term outcome of my investments. In my career, I had to learn the hard way that one needs to have the logistics in place to sustain a strategy. When I was advising private clients that meant having enough liquidity at hand to ensure the client could cover her cash flow needs for the next three to five years without having to touch their equity portfolio. I have discussed one approach I used here.
When I was managing equity portfolios for institutions, I introduced stop losses and other risk management techniques even in value portfolios. Why? Because this way I could make sure underperformance wasn’t going to last many quarters in a row. This way, my investors didn’t have to suffer through several quarters of reporting discussion and explanations of why I underperformed. This obviously meant giving up some upside in cheap stocks in the short run, which is why I complimented my stop losses with re-entry triggers based on the price momentum of these stocks, so I would buy cheap stocks again, once they showed signs of a sustained recovery. All of that is to ensure I have enough logistics in place to help my investors through a soft patch of extended underperformance.
Throughout much of my career, I was guilty of being in love with strategy and thinking constantly about it. Over time, I have learned to love the seemingly mundane tasks of logistics.