Adding color to my earlier post on business from/of investing - particularly on external capital management (ECM) side.
ECM is the most desired profession for investors as they start becoming successful in personal life. We tend to assume that we can emulate personal success on external capital too. However, differentiating factor here is that external capital brings unwanted gifts along in the form of external minds which are generally more volatile than portfolio scripts, thus adding new risk dimensions to be managed by the fund manager. Since, remaining 100% invested is a given for fund managers, it become further difficult for them to manage external minds during market excesses - specifically in bear markets. To summarize, more than stable money, stable minds are a blessing for money managers.
Real test of money managers - length of time-wise correction
In the last 15 years, bear markets have been relatively shorter, while degree of correction being on higher side. Perhaps, longest bear market streak on benchmark indices is of 1.3 years - during great financial crises (GFC) (Jan 2008-Mar 2009). Surprisingly, in the last century, US markets have shown nearly 3-year correction only on 2 counts - (1) Great Depression (1929 - 1932) and (2) Dot Com bubble burst (2000-2003). Important to note, such market conditions are still untested waters for most of the new generation money managers.
Therefore, real test of fund manager acumen, psychology and investment strategy will be during conjunction of both long time-wise corrections and large price-wise downturns. To substantiate in Indian context, small caps have been in a slightly more than 2-year down cycle (Jan 2018 to Mar 2020). Sans professional MFs, how many small cap money managers starting before Jan 2018 are still clinging to their small cap bets? May be very few.
Volatile Minds - Bubbles and Crashes
Bubbles are created and deflated by humans over time in a repetitive fashion, although people on both the extremes could be different. The success achieved by series of actions undertaken by global central banks and governments - particularly on Western World side - during GFC has brought confidence among such institutions that âeasy moneyâ is the solution to any problem. Speed of infusing liquidity is now far more relevant than quantum of liquidity to avert crisis. Further, this has built assumption among market participants that central banks/governments will continue to support financial markets through liquidity infusion in the long term.
How far we can go on this remains to be seen. What volatile minds will do next in case economic recovery is not on expected lines? Add more liquidity? Future will tell.