Pub. 4 2015 Issue 4

l e a d i n g a d v o c a t e f o r t h e b a n k i n g i n d u s t r y i n k a n s a s 26 T HERE ARE ALWAYS SOME PORTFOLIO managers who have convinced themselves, and perhaps others, that they can predict the timing and direction of changes in interest rates. For those lucky soothsayers, the management of their banks’ investment portfolios has been easy, based as it is on the never- ending mantra of “rates are going up.” Since they “know” rates are going up, it then follows that only the foolhardy and uninformed would actually invest money before the rise occurs. That’s just common sense, right? Well, to paraphrase Winston Churchill, never have so many been so wrong about so much. The Fallacy of Foregone Conclusions Since the FOMC first took the fed funds target rate to its current, near-zero level in December 2008, it has been the opinion of more than a few portfolio managers that, simply because rates had reached such a low level, they had to go up, and soon. Even the FDIC had a role in reinforcing this ruse with the publication of “Nowhere to Go but Up: Managing Interest Rate Risk in a Low-Rate Environment” in their Supervisory Insights publication. When that article was released in December ’09, the ten-year Treasury note was yielding over 3.50%. Now, more than five years later, the yield on the ten-year Treasury note languishes near 2%. It seems rates actually did have somewhere to go besides “up.” Dewey defeats Truman. So, how did those “rates are going up” prophets fare with their single-faceted prophesy? To be kind, it can be said their profits suffered. To be less kind, it can be said they couldn’t have been more wrong had they tried. The opportunity costs of maintaining ultra-high liquidity and limiting actual investments to the ultra-low yields of money-market-like alternatives is surely painful for those oracles to contemplate. Replacing Hope with Action Other portfolio managers, however, have not had to endure those painful sacrifices. These are the portfolio managers who did not try to convince themselves, and perhaps others, that they knew the timing and direction of changes in interest rates. These are the portfolio managers who had the self-discipline not to take the bait of a “sure thing” bet, like rising rates. These are the portfolio managers who avoided the trap of speculation. These are the portfolio managers with a strategy. SPECULATION VS. STRATEGY: WHAT DRIVES YOUR INVESTMENT DECISIONS? By Lester F. Murray, Associate Partner of The Baker Group LP