By Roger Schreiner
March 2, 2010
Loeper points out a number of strategies that I could use during the contest to ensure that I won’t lose. None of these would guarantee that I win, mind you, which Loeper fails to admit. I could move my account entirely to cash, simply put 5% in cash, or I could replicate the passive portfolio most of the time and then move to cash near the end of the contest.
I would do none of these, because it would not be in the spirit of the contest. I would employ the same disciplined trend-following process I’ve been using for our clients for over twenty years. But nonetheless, thank you, David! You’ve proven my point! You’ve discovered for yourself what so many fail to recognize: that active management has an inherent advantage over passive investing. In your attempt to mock me, Mr. Loeper, you have helped me make my point. The ability to actively manage market exposure makes my process superior to any passive one.
The focus of my challenge is squarely on risk management – specifically, risk reduction. It’s not about my ability to forecast the markets. I claim no such ability. Our investment strategy is to own stocks when the market is strong and sell them when the market is weak. By comparison, the investment process (if you can call it that) of the passive investor is embarrassingly simple: hope.
Mr. Loeper, I read your challenge carefully. Compared to mine, it’s complex. There are a lot of rules, and it does not address investors’ main concern: the risk of loss. Leave it to a passive investor to ignore the 800 pound gorilla in the room.
The vast majority of investors (especially older ones with significant wealth) will tell you that asset preservation is their number-one priority. Warren Buffett agrees. He often reminds investors of his two rules for investment success: “Rule #1: Don’t lose money. Rule #2: Don’t forget rule #1.”
The greatest threat to investors is uncertainty of the future. It’s the next crisis – the next black swan. If you accept buy-and-hold, you are accepting that, at some point, your retirement savings will experience a devastating loss or series of losses. The ten largest stock markets in the world have all crashed more than once. And the bigger they are, the harder they fall, it seems. The two largest have also experienced the largest declines. In the U.S., the Dow fell 89% from 1929-1932 and in Japan, the Nikkei has fallen 82% from it's all time high in 1989 to the recent low in March of last year. Next week we will publish an extensive look at the troubles in Japan, which once boasted the largest stock market in the world. I always tell investors, “If your investment process does not include an exit strategy, you shouldn’t be invested in the stock market.”
My challenge is straightforward and fair. I leave most of the options to my passive challenger, including the length of the contest. I even allow them to choose the assets in their portfolio and mine! And I saddle myself with a two-percent management fee while waving all management fees for the passive portfolio. Loeper says I’m “stacking the deck?”
David, you should stop posturing and debating and accept my challenge. If you do, you must be willing to consider risk and return like a real-world investor. The results should be measured by return, (dollars of wealth), and risk (standard deviation). Bring it on, my friend. My charity could use your support.
Roger Schreiner is the founder and CEO of Schreiner Capital Management, Inc. (SCM), an SEC-registered investment advisor located in Exton, Pennsylvania. SCM is a third party investment manager and sponsors the Select Advisors Wrap Program, an investment platform that provides active investment solutions for Advisors and their clients.
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