Stock Market News for June 2002

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The Neverending Game
About the only working environment harsher than the investment industry during a market downturn would be professional sports. The bright lights, the glare of the media, the demanding fans expecting immediate results no matter what the conditions - and that's just the investment management business. Imagine what it's like in professional sports!

Have you noticed the fact that the professional athletes, the players, don't get fired, but rather they get traded? Management, on the other hand, gets fired. Sounds a bit like investments in a way.

As an investor, one tends to swap out an individual investment that is not performing inline with expectations for another that looks like it will to live up expectations. Like a sports team, our portfolios consist of a team of players that, individually, are expected to perform. Stop performing and it means you're benched.

Many of us, sports fans or not, understand that there are two factors that determine success for a team: The players and the coaching. Sometimes a team with inferior players manages to win against the odds because the coaching is so superior. Conversely, some teams having superior talent find a way to lose because the coaching is so lousy. So when is the coach of the team at risk for getting fired? There are two potential scenarios. One scenario involves putting the wrong players on the field; and the other involves calling the wrong plays.

Unlike sports, where teams have a limited number of unique players, investment managers have an entire universe of players available to put on the field. Managers, therefore, must take full responsibility for the talent selected to execute the strategy. But also, unlike sports, the investment manager calling the plays for the portfolio has a distinct challenge that the sports coach does not face. The manager does not get to see the opponent's players on the field. What if we had expected the legendary Tom Landry to design and execute offensive plays but he couldn't see the defensive players of the opposing team? These are the conditions under which investment managers call their plays. They have no way of knowing what obstacles the market will put up before running the play.

To carry this sports analogy one step further, consider this critical point. As an investor, you have an invaluable advantage over the team owner: No time clock. As for the coach responsible for putting the right players on the field and for calling the correct plays, this is an enormous difference. It means that if the wrong players are sent onto the field or if, in the absence of knowing what defensive formation the opposing team is using, the wrong plays are called, the coach has time to make adjustments. The game never ends!

So it is with investing. The game never ends. If we think of it in those terms, rather than the need to score quickly because the clock is running, we have a better chance for success. If you look at the successful sports franchises, the true dynasties, most of them have a similar story. For example, Phil Jackson is on the verge of leading the L.A. Lakers to their third consecutive NBA Championship as head coach. This is on the heels of his six world titles in eight years as the head coach of the Chicago Bulls. Not bad. But even Coach Jackson had sub-par seasons. Fortunately for Laker fans, Coach Jackson did not lose focus of his winning philosophy, and the owner did not lose confidence in his coach.

And so it should be, we think, with investing. It is those that fare the best that keep their sound, long-term winning philosophy undamaged by periods of temporary turmoil in our economy. So, who is the real opponent in investing? It's making bad long-term decisions based on short-term conditions. Be patient, it will all come around.


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