THE FRITZ REPORT

In the course of writing this blog, I have often discussed the importance of time in investing, particularly for the kind of fixed income investing in which the cash flows are known (or nearly known) and there are no credit or earnings assumptions. The vast majority of managers who purchase fixed income investments do not plan to flip them for a quick profit if the price of the instrument goes up. For those of you in the banking arena, you are familiar with the accounting option of designating securities as "Held to Maturity," or HTM, which actually restricts one from selling them prior to maturity. Contrast this to stock investing. Most people who buy stocks intend to sell them at a hoped-for price, but in any case, sometime in the near term. Of course, stocks do not have maturities, so the idea of HTM in their case wouldn't make any sense.

So, I have often brought up the importance of time in this blog. Today, I'd like to dig into how we should think about time, and to do this, we'll consider the Greeks. Normally, when I bring up the Greeks, I am talking about option theory—specifically, the Black-Scholes model. Gammas, vegas, you know.

Not this time. I'm talking about actual Greeks—their language, to be precise. The Greeks actually have two words that we would translate into the same English word, time: Chronos and Kairos.

These are actually two very different ways to think about time. Chronos signifies a proper, or opportune, time for action. You may recognize Chronos as the root for our English word chronograph. A chronograph watch usually has several complicated elements added to it, but one of them will always be a stop watch. Chronographs are known for their extreme accuracy in measuring a specific time frame.

Let us consider the impact of Chronos on investing.

Investment decisions always seem to be made under time pressure. Maybe the market is moving, or the investment supply could be rapidly diminishing. Often a transaction counter-party adds his own time pressure.

This is when you have to be in the moment reviewing the analysis and considering price, and ultimately, making the yes or no decision. No one can doubt how important these moments are and, in fact, just like timing an Olympic downhill with a chronograph watch, we have to depend on extreme accuracy in our decision making. Mistakes can be made, and they may be costly. Picture yourself in the heat of the moment with a broker breathing down your neck, asking for an immediate decision. You need to be very good in these moments. The broker-dealer community is fixated on Chronos. Virtually all of the single statistic parameters that the financial industry has created—yield, duration, spread, average life, and so forth—have been created with the idea of immediacy. Each of them is a moment in time number, and in some cases, they are extremely precise, down to three or even four decimal points, yet in many cases in their use, they can be very misleading and often even dead wrong. More on that in a future post. The nature of these statistics, or trading parameters, seem to have been specifically designed to encourage immediate action. What about catching a good price? We often feel time pressure to save one or two 32^nds in price and trade analytical time to get it. When you quantify the value of this, it means almost nothing. For a one-million-dollar investment, saving two 32^nds equates to $625, or $52.08 per month on a one-year maturity, $5.21 per month on a ten-year maturity. If the haste in capturing this led to a poor decision, that savings seems like very little compensation, doesn't it?

So that is Chronos; what about Kairos

Kairos refers to chronological, or sequential time. It has a much more qualitative meaning. This is how a logician might think of time.

Let me explain.

Yes, the Chronos aspect of decision-making is incredibly important. We must have great analysis, the ability and will to make decisions in the moment, and the courage to say either yes or no. Kairos on the other hand implies a much more strategic view of time. In other words, it fits exactly into what I have been arguing for the last 25 years: that we need to make decisions over time. To be a great investor, we have to inject some appreciation for Kairos into our decision-making process. Saving a tick or two in Chronos mode can help, but only if it doesn't introduce regrettable results on a more Kairos time frame. A focus on making the right long-term decisions by implementing a suitable decision-making horizon is so much more important than snagging a small discount in haste.

One of the infamous sayings in the bond business is, "There's always another bond coming down the tracks."

Thinking in Kairos mode allows us to think strategically. It gives us a more holistic view of our portfolio, and ultimately of our organization. Instead of trying to grab the one really cheap asset that we are being shown right this minute, Kairos appreciation gives us the ability to think longer-term. It also gives us the incredible ability to simultaneously consider multiple scenarios: rates down, rates unchanged, and rates up, for instance. Scenarios that aren't about now, but about future chronological time—Kairos. We might even have the patience to consider extreme scenarios, to identify what would have to happen for the investment to go terribly wrong. Wouldn't that be prudent?

So, am I saying that we should only employ Kairos-mode decision making?

The short answer is no, but my explication may take some developing.

It is my firmly held belief that we need to be strategizing and planning, over time, for our portfolios. The decision whether to play offense (greater reward in rates down) or defense (less pain in rates up) with the portfolio is both a portfolio and an institutional decision. This should be determined thoughtfully, and once decided, it can help us focus on the relevant areas of the market we need. This is a process in which a group of people, like an investment committee or a board, can and probably should have input. It will most likely be influenced by not only the collection of securities that you already own but also by the characteristics of the rest of your balance sheet, your operational needs, and so forth. When done well, the result is a strategic plan under which you can operate on a day-to-day basis with more efficiency. This Kairos mode thinking should inform and improve your real-time Chronos-mode decision-making.

So, while Kairos is critical, it is not your only valuable approach to time. Once a strategic outline has been set, we will need to switch to our best Chronos mode. This is when technical expertise comes into play. When it is time to make a decision, we need to be spot-on with our analytics. Be ready to ask questions and call out weaknesses in any analysis you are provided by others, especially counter-parties. With the appropriate confidence that comes from all the prior Kairos mode effort, you might just snap up a 32^nd or two—safely.

Combining these two ways of thinking about time can give us a very powerful framework for investing. If we succeed in combining the qualitative (Kairos) discipline with the technical accuracy (Chronos) discipline, we will be well on our way to becoming great investors.

Combining these two ways of thinking about time can give us a very powerful framework for investing. If we succeed in combining the qualitative (Kairos) discipline with the technical accuracy (Chronos) discipline, we will be well on our way to becoming great investors. Does this mean that we will not make mistakes? Of course not, but these same two disciplines can help us identify and hopefully eliminate the ones we have made and minimize those we intend to make in the future.

Final, final thought: Snow always seems cute and beautiful in the fall when the first snowflakes fall, but enough already—let's get to spring. To our friends in Texas and across the southern region: We wish a speedy recovery to you and your neighbors.

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