An attractive woman in her early 40s walked right up to us and gushed to my companion, “Aren’t you …?” It wasn’t the first time I saw that happen.  But usually it’s an older male in the financial business.  Such is the power of being a “Rock Star“ portfolio manager.  You become a celebrity.  To qualify as a Rock Star, I submit, you have to have a 10-15 year record of outperforming the S&P 500.  Few managers do.  However, this particular Rock Star, as all the others before him, had achieved his status in the last century.  You cannot name a star portfolio manager of this century.  There isn’t one.  Why is that?

I believe it is because in August of 2000 the New York Stock Exchange transitioned from an open outcry market to a computer driven electronic market. It was a dramatic change from when stocks were quoted in 1/8s (12.5 cents).  The change narrowed the spread between bid and asked from 12.5 cents to one cent!  This decimalization, like many new ideas, had with its creation unintended consequences; it paved the way for algorithms (computer code) to take over stock trading.

Algorithms are computer instructions.  If “a” happens the computer is instructed to do “b.”  Buy or sell.  And it is done instantly.  The “algo” is not making a long term investment decision.  And therein is its greatest benefit … and weakness.  The benefit is that short term the market becomes more efficient … for that macro influenced moment.  The weakness is that all short term trading is simply market noise.  Noise created by events.  But portfolio performance is really determined by individual stocks.  It is only in the longer term of six to eighteen months that the market becomes truly efficient.  And that is the crucial difference between trading and investing.  The longer time frame favors the Rock Stars.

I came into the investment business in 1966.  Of course, then there were no computers used in the investment process.  There was no High Frequency Trading, no Program Trading, no ETFs or Index Funds.  All this lock-step trading was made possible in 2000 by the move to decimalization and subsequent computerization.  It created a commoditization of stocks driven by purely macro events.  In this top down approach one is immediately right or wrong.  It’s a 50/50 proposition … which ultimately makes it a 0 sum game. This, I believe, is why there are no current managers venerated as Rock Stars.

The underperformance, and in some cases massive underperformance, of hedge funds for the past five years suggests to me that this 13 year era of lock-step portfolio “management” is … OVER.

INDIVIDUAL stock selection has always been the determinant of portfolio performance.  If you invested $1,000,000 in 1986 in 40 stocks and 39 went out of business but the one that didn’t was Microsoft … you would be absolutely ecstatic.  That is the power of stock selection!    

Francis Patrick Boland