Congratulations to Gary Woodland for winning his first major championship on Sunday. As a former Kansas State University golfer, it’s not easy to congratulate a former University of Kansas golfer, but what he showed us on Sunday was nothing short of daring, confident and determined. From the 3-wood he hit on hole #14, to the chip off the putting surface on #17, to the 25-foot putt he holed on the 72nd hole of the tournament to seal a 3-shot win, Woodland never wavered…never succumbed to the pressures and mental strife of “playing not to lose.” It was clear from his first tee shot (and later confirmed by his caddie), that Gary was there to WIN, and nothing else was an option. He took a stance, planted his flag firmly in the ground and was committed to his belief in himself.
Too often in the investment world, there’s a temptation to chase hot money and we are intimidated to take a stance and plant our flag in the ground. This can be evidenced by the historical amount of money that has flowed into passive strategies over the last decade. Certainly, there are active strategies that have faced headwinds (in large part due to the rise of cap-weighted strategies buoying mega-cap names), but there are many that have provided significant value (as measured by alpha). If Gary had not put in the time to prepare and had the confidence to hit that 3-wood on hole 14, rather than laying up like most players would, then who knows what would have happened; but it probably would have held him in line with other players and would have diminished his chances of standing out as a winner. If he had decided to play for bogey on hole 17 and not chipped the ball from the green, then he may have faced a similar fate…playing in a sea of sameness with the rest of the field.
As investors, we need to take calculated risks, and prepare client portfolios for our next win. When will that be? No one knows for sure, but we are planting our proverbial flag in the ground and taking a stance regarding the historical amount of money being placed into passive, or cap-weighted strategies. Hidden and unforeseeable risks exist in these types of strategies and we don’t know when exactly the pain will be felt, or exactly what it will feel like, but no doubt it’s coming and there will be ways to profit when it does. For example, look for managers with asymmetric upside/downside capture ratios, managers who deliver real value/alpha, and managers with a proven thesis and repeatable process.
Like Gary, step to the first tee and play to WIN. Don’t play “not to lose.” Cap-weighted strategies have been a great way to keep up with the Joneses on the way up—but will likely keep pace on the way down as well. Don’t get caught laying up with everyone else. Grab that 3-wood on hole 14, chip the ball from the green on hole 17, drain that winning putt on hole 18 and make sure you’re paired up with good active managers.
Read our last blog post, Are Retail and Institutional Advisors on the Same Page? >