Given the recent controversy about Peter Schiff’s recommendations, I thought that it is useful to explore the framework that investors should judge his record, or anyone else's record for that matter.
A framework for analysis
Investment processes vary from portfolio manager to portfolio manager, but this is a basic outline of what an investment process looks like:
Selection: What do you buy and sell?
Portfolio construction: How much do you buy and sell (in a risk controlled fashion)?
Trading: Pulling the trigger, or when and how do you buy and sell it?
Review and control: Did you do everything (all of the above) right?
We spend most of our time thinking about the first step of the investment process of what to buy and sell. Brokerage analysts do that every day. In addition, there are various services that try to emulate the buys and sells of other investors such as Gurufocus and Mebane Faber’s alphaclone.
Two standards to judge Schiff, or any other advisor
Given our natural intense focus on selection, it is natural to judge an investment advisor on the quality of his picks and opinions. By that standard, his opinions weren’t too bad. He did call the economy's decline correctly and it was a great call. He was, however, wrong on the decoupling thesis and the emerging market/commodity play.
There is a second much tougher standard to judge Schiff – as a portfolio manager. A portfolio manager is held to not just the first step of the investment process (what to buy and sell) but on all parts of the process based on his overall performance. By that standard, Schiff failed dismally. As I understand it, he overstayed his welcome in the commodity and emerging market trade and performance suffered as a result.
(Incidentally, my opinions are similar to Schiff but the positions in my own portfolio were stopped out in the decline. That is why I don’t represent this blog as investment advice. I know nothing about your preferences. I don’t always tell you when to sell, because I don’t know your risk appetite. I don’t tell you how much to buy and sell. If you really wanted all of the above you would be paying me and we would have a real business relationship.)
What do you do after you’ve decided on what to buy & sell?
This is a cautionary story for investors. Beyond the buy and sell decision, they need to pay attention to all the other stuff of putting together a portfolio. That is the reason why I have felt a need to explore this topic in my book project, What do you do after you’ve decided to buy and sell? [*]
For example, if an advisor recommends a buy on Citigroup, is that a bet on the specifics of the stock or the financial services sector? That’s also why I spent a lot of time on portfolio characteristics (example here, here and here).
[*] If any reader in the publishing industry would like to take this further or if you know of anyone in the publishing industry who would like to take this further please contact me at cam at hbhinvestments dot com.
The 6am London Cut
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