Pretty Is As Pretty Does

One of my favorite horse trainers had a great saying. When shown a big, elegant, young jumper prospect, he would say ‘pretty is as pretty does.’ One of his most successful jumpers was a jugheaded, roman-nosed horse whose front legs ‘looked like they came out of the same hole’ as he put it. But that horse could jump the moon.
Still, his clients liked the pretty horses that were nothing but trouble. The world just works that way. Our stocks are inelegant to the extreme and often belong to the ‘old economy’. Clients often wish we owned Facebook and Tesla.

The same thing applies on a larger scale. We operate in the simple realm of stocks, bonds, cash, and for some, real estate. Private equity, hedge funds, currency and commodity funds are constantly sending out their siren songs in the media. First this one is ‘hot’, then that one.

But ‘pretty is as pretty does.’ Recently, the Wall Street Journal published an article, “Big Investors Missed Stock Rally”, detailing how large pension and endowment plans, because of increased allocations to ‘alternatives’ and away from plain vanilla stocks, experienced much reduced returns over the last few years as a result of those allocations. Granted, the funds’ ten year returns were buoyed by alternatives because of less volatile performance in the ‘08/’09 period. But that lower volatility could have easily been achieved with government bonds, one of the simplest, cheapest investments available.

We’ll stick with contrarian strategies that deliver controlled volatility and inches of incremental return over time, rather than miles of return at the cost of big swings in portfolio value.