If you've known me a while, or simply read a good portion of
this blog, you are aware that I love food. I love to eat it, to cook it, and to
think about it. If you're just meeting me, take a look at my waistline! One of
my favorite pastimes is to find a good recipe and try to make it on my own. I
actually enjoy leafing through a cookbook and visualizing how great I could
make "that" dish. This may stem from my father being a chemist. It seems that if
you follow the directions and do your best, it should end up looking just like the
photo in the cookbook, right? Unfortunately, that's not what always happens. I
have had some successes in my day, but every once in a while, I have a minor
disaster. My wife and kids will never let me forget the time I tried to make a
cherry balsamic chicken, but I keep trying complex dishes nonetheless.
Which brings me to my title, Mise En Place. Its official translation from the French language is "setting up." But for those of you who like to cook, you know it means more than just setting up. Mise en place is a French term for having all your ingredients measured, cut, peeled, sliced, and grated, before you start cooking. In a perfect world, you would have all of your pans, cutting boards, bowls, and necessary equipment laid out in front of you as well. Professional chefs use this technique to make sure that they have everything they need before any stirring, heating, or mixing is even started. Based on my previously-confessed obsession with cooking shows, I have seen how well this works. Unfortunately for me, I haven't made it a lifestyle in my own kitchen: I am usually scrambling around looking for some spice or an egg or some kind of pan halfway through the process! When I watch Gordon Ramsay cook on one of his TV shows, what I see are all kinds of little bowls with pre-measured ingredients, close at hand, and somehow, magically, he whips up the dish without much apparent thought or effort.
Now for my specialty, the Fritz Surprise. You know, how I turn from my opening subject back to banking and investing. Ta-da!
Here we go: consider your investments, whether yours personally or
in your professional role as a portfolio manager. How do we all make decisions?
I think it would be fair to say (at least for me), that when I hear a good
story or theory, I examine it fairly quickly and try to arrive at a decision.
How often do I consider the rest of my investments in the context of the
currently available, exciting opportunity? Almost never. Perhaps you are an
exception to this rule—if so, good for you! No cherry balsamic chicken disasters
for you!
Does this mean that we can never make good decisions quickly? Not
at all, some excellent decisions can be arrived at quickly. Gordon Ramsay makes
a dozen very fast decisions when he finally begins to actually cook.
But many too-quick decisions don't quite work as well. Remember,
Gordon has his mise en place set up
before he starts moving quickly. Most of the people reading this post are
engaged in an ongoing portfolio management process, and would not want to say they
get caught up in the hype of the moment, yet I cannot tell you how many times
people have told me they bought a security because a fast-talking and very nice
salesperson told them it was "cheap"! Or, because they fell under the spell of social
proof: everyone else was buying it.
A "cherry balsamic moment" for many fixed income investors
occurred back in those glorious days when we had slope in the curve. Everyone
was in love with callable step-ups. So many people bought them joyfully. Other
people were in the business of selling them, perhaps even more joyfully. Investors
have ultimately been the big losers. The big winners out of the callable step-up
frenzy have been the agencies. Not only did the buyers of these securities
receive less coupon income than they would have from fixed rate alternatives,
they are now seeing these investments being called away, forcing them to
collectively reinvest billions of dollars in a terrible, low-rate market. This
incredibly bad combination of poor call protection plus terrible coupon structure
is coming home to roost. How did it happen?
Mise en place. Or rather, the lack thereof.
For those of you who manage a portfolio of bonds, think of that
portfolio as a whole dish, made up of many ingredients. So many times, I've
observed managers scrambling after a bond because it is cheaper by 2-3 basis
points than some other bond. It's kind of like me throwing in slightly better red
onions when the recipe actually calls for mushrooms; what kind of sense is
that? The beauty of working with portfolios of assets is that we can constantly
fine-tune our sauce. Many of the portfolio managers I have worked with hold several
hundred-line items. We end up loving some of them, and some leave a bad taste.
One of my mentors (and one of the founders of Performance Trust), Phil Nussbaum, boiled it down into three very simple maxims
- Acquire good risk/reward securities
- Eliminate bad risk/reward securities
- Select good combinations of securities
When cooking a spaghetti sauce, it is very hard to eliminate a bad
ingredient once it has been blended in, but thankfully when dealing with a
portfolio, this can be done. As I mentioned a couple of posts ago, we will all
make mistakes. That is a fact that none of us can escape. When you come to
realize you have made a mistake, exit it quickly, even though it may cause you
some discomfort. In my experience, while some may be unhappy about the mistake,
most will be more pleased that you recognized the error and fixed it. The
conventional wisdom says we should always be perfect, but no one really expects
that. In fact, you can really build credibility and respect when you identify
and explain your errors. It's not always fun, but so worthwhile.
How will we know if our recipe is any good? One of my favorite takeaways from Chef Ramsay
is that he commands people to constantly taste their food always and
continually from beginning to end.
My analogy for portfolio managers is that you need to be watching your portfolios always and continually. If you lay out all of the potential investments in front of you (mise en place), as well as your existing investments, then you can choose the exact ingredient you need to add to or remove from your portfolio at any given time. Is this do-able? Yes.
My analogy for portfolio managers is that you need to be watching your portfolios always and continually. If you lay out all of the potential investments in front of you (mise en place), as well as your existing investments, then you can choose the exact ingredient you need to add to or remove from your portfolio at any given time. Is this do-able? Yes.
This approach gets even more valuable when you look at the bigger picture. You are not only cooking one dish (the portfolio), you are preparing a feast (the entire balance sheet).
This approach gets even more valuable when you look at the bigger picture. You are not only cooking one dish (the portfolio), you are preparing a feast (the entire balance sheet).
Let me put it this way: You are cooking an entire Thanksgiving
dinner and you have seven separate but complementary dishes all going at once.
You need to practice the discipline of mise
en place to make it come out right. If you just have stuff laying around
all over the place and start jumping from pan to pan, throwing in ingredients you
only just thought of, the result is likely to be a big fat mess. Similarly, we need
to have all of our financial ingredients lined up and ready to go when and if
we need them. We do not want to fall for one-time, hot sales pitches and just
toss that in.
We do not want anything like my cherry balsamic chicken.
We do want to follow a disciplined
recipe of buying good risk-rewards, eliminating our mistakes, and crafting good
combinations.
Mise en
place.
Final, final thought: Chicken Tikka Masala…'nuf said. I know, I've
said it before. So 'nuf said again.
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