8 Reasons Why I Tweet My Daily Performance
When I transitioned from a career in the chemical industry to investment management in 2007 I was at first surprised, and later appalled, at the lack of attention being paid to performance and continuous process improvement by retail financial professionals.
Even more astounding to me is the complacency with which investors accept this lack of attention. In what other industry does a consumer buy a product or hire a service provider without first having agreed on performance specifications and/or expectations?
Look at any mutual fund prospectus. What return (either absolute or relative) is the fund manager trying to obtain in the coming year? Chances are you won't find it. What you will find are lots of historical performance data spanning several time periods, along with a disclaimer that these numbers have absolutely nothing to do with what you can expect in the future. And you'll be given a list of risk factors - things that can go wrong and cause you to lose some or all of the money you invest. No commitments; only risks. Why would anyone buy a mutual fund under these circumstances?
Part of the answer may be that money managers, brokers, and financial professionals have gotten pretty good at dodging the performance issue over the years. They will explain the vagaries of the capital markets, uncertainty about economic growth due to unpredictable monetary and fiscal policy decisions, unknown global business and political factors, etc. But while all of this is certainly true, the point is that many of these managers aren't even trying to measure and improve upon the effectiveness of their management processes.
But why not? After all, aren't the uncertainties faced by money managers the same as those faced by manufacturing firms? Yet setting realistic and attainable targets, and responding to competitive forces by continuously improving operational processes, are hallmarks of well-run businesses.
When I formed Johnson Harper LLC in 2009 I believed then, as I do now, that there is a significant unmet need in the investment management industry for more rigorous processes and continuous improvement activities.
The task is certainly formidable. There is little published on this topic as it pertains to investment management, and so I have had to develop my own techniques based in part on my experience in the chemical industry. Along the way I have gone down many blind alleys, lost many clients, and ultimately have had to unlearn many of the generally-accepted investment theses I had been 'taught' over the years.
But I believe the effort remains worthwhile, particularly in the current climate of uncertain pensions, questionable social security retirement benefits, and the resulting need for future retirees (and we all expect to become one someday) to take greater ownership of whatever nest egg they are able to accumulate throughout their working years.
My latest activity in this ongoing effort is to begin posting on various social websites the daily performance of the investment portfolios that I manage. Because my clients have separately managed accounts, the values I report are Time Weighted Returns (TWR) aggregated across all client accounts and generated by the brokerage firm that I use.
Given that clients open and close accounts, and add and withdraw funds, time weighted returns provide a way to calculate investment performance by eliminating the impact of these cash flows into and out of the accounts. In this manner it reports performance solely attributed to the portfolio manager's (in this case, me) actions. For more information about TWR, please see this link.
Each daily post includes the overnight return, the month-to-date return, and the return since I began doing this (inception date of July 1, 2013). The posts look something like this:
"Johnson Harper LLC consolidated TWR: 18-Oct daily = -1.02% ; MTD = -0.79% ; since 01-Jul-2013 = 6.00%"
Here are 8 reasons that summarize why I believe such postings can be of value, both to you and for me:
1. Posting keeps me focused on investment process and performance. A vice-president of one of the chemical companies I worked for once said, "If you want to lose weight, get on the scales every morning." The discipline required to take the daily measurement of your weight reinforces the importance of the task at hand. Conversely, if losing weight is not important to you, then there is little point in weighing yourself each day. My investment process is extremely important to me, and I want to monitor it, and be prepared to adjust it, daily (particularly in these times of heightened uncertainty).
2. It provides a means by which investment process capability can be determined, thus allowing me to establish performance targets on the basis of this capability. Through the use of statistical quality control and statistical process control (SQC/SPC) charts, one can determine a) if there is a consistent process being employed, b) what the process is capable of producing (by way of an average output and variability around that average), and c) if the process is deviating from its control limits (i.e., is it becoming 'out of control?'). The details as to how this is done, while straightforward, are lengthy and beyond the scope of this article (but I do intend to further elaborate on this in future articles).
3. Monitoring daily return performance can greatly shorten the time required to evaluate a manager's performance. If you do an Internet search to find the time required to evaluate the performance of investment managers you may find links that discuss time periods such as 3 years, 13 years, and even 40 years -- given these excessively long periods of time it's little wonder that most investors just pick a manager and stay with him or her until forced by circumstance (manager retires; investor's financial situation changes) to find a new one.
But one reason for these very long time periods may be the sampling frequency; if you measure performance once a quarter it will take longer to discern what's going on than if you measure performance once a month. But this is a bit like weighing yourself once a quarter and then saying you must wait 6 years to determine if your dieting regimen is effective. If one assumes that a minimum of, say, 24 data points are needed to determine a statistically significant trend, then you would need 24 years of annual return data, 6 years of quarterly data, 2 years of monthly data, but only 24 market days (a little over a calendar month) of daily return data to assess the effectiveness of an investment process.
Granted, one month is admittedly a very short period of time but, say, 6 months of daily performance numbers would give you a much richer data set (about 125 data points) with which to make an evaluation. Why wouldn't you do this?
4. Provides another benchmark for comparison. If you overlay the daily performance numbers I provide with the daily changes in your own investment portfolio (whether you manage it or it is managed by others), you can (over time) get a sense of three very important aspects of portfolio management.
a) How does the volatility of one portfolio compare to the other ('beta')?
b) Does one portfolio consistently generate a higher excess return than the other ('alpha')?
c) To what extent are the returns of the two portfolios correlated?
Quite frankly, if the volatility of your portfolio is lower than mine, and if you're achieving a higher excess return, then there would be no reason to hire me as a money manager... And perhaps even a reason for you to become a money manager (assuming you manage your own investments and have the interest in doing it for others).
But I'll elaborate on this topic as well in future articles.
5. The performance adds to (or detracts from) my credibility as a knowledgeable manager. By posting my performance on a daily basis I am, in a manner similar to the legend of Cortez, "burning my ships in the new world." I'm motivated to succeed, because there is no going back. Either I can demonstrate a consistent management process with the potential for continuous improvement, or I can't.
How many articles, media interviews, investment newsletters, and unsolicited snippets of "free advice" are you exposed to each day? And just how credible are these sources? Do these 'talking heads' actually accept the responsibility and accountability that goes with managing other peoples' money (not as easy as you might think), or are they compensated simply for dispensing ideas, suggestions, and/or "expert opinion?"
The question I always want to ask is this: Rather than tell me how to become a successful investor, why don't you demonstrate your credibility by reporting your daily performance in addition to the advice you are dispensing?
6. It sets an example for others to follow and, hopefully, to build upon. At the beginning of this article I criticized other retail financial industry participants for not trying to measure and report the effectiveness of their processes. I can't say for certain at this point where my own efforts will lead, but I do get satisfaction from knowing that I am trying, and that I am willing to report my progress (or lack of it).
I am part of the baby boomer generation that will soon be faced with the challenge of not outliving their assets. This, in turn, leads to the challenge of understanding the concept of "portfolio drawdown" during retirement, which has as much (if not more) to do with portfolio fluctuations (i.e., volatility) as it does with average return.
I'd like to be part of a movement that takes a fresh look at these challenges and that can potentially provide investors with a higher degree of confidence in their ability to select investment alternatives that will allow them better control over their assets.
7. It addresses the question of "what was your return last year?" When I meet people and tell them what I do, I am invariably asked this question. There are both regulatory and ethical reasons for not engaging in a response. The primary reason is this: I do not manage a mutual fund; my clients have separately managed accounts. As such, their individual portfolio assets differ widely in size and, while they largely hold the same investments, they do not hold them in the same proportion as other clients may hold them. Thus, client returns can vary somewhat depending on the asset mixes in their accounts.
I prefer instead to discuss what I am trying to achieve in aggregate for myself and my clients, then refer them to my daily posts of overall TWR across all of the accounts I manage.
There are never guarantees, of course. And we are all told repeatedly that past performance is no indicator of future success. But I believe that tracking present performance can provide an indication of the existence, or not, of a process that can show indications of being within appropriate control limits.
8. Clients, friends, and colleagues can provide referrals with a greater degree of confidence. The social media website LinkedIn now allows members to "endorse" their contacts for various skills. While useful in theory, I find that I receive a lot of "endorsements" from contacts that, frankly, have little or no actual knowledge about my skill set.
I well remember in the early days of LinkedIn one of my contacts saying to me, "Alan, you're a great guy and I like you a lot, but I have no idea how effective you are at managing money." Posting my returns on a consistently updated basis (i.e., daily) begins to address at least a portion of his uncertainty about my skills.
Those that refer me will have some quantifiable evidence behind their referral (assuming, of course, that such evidence is positive - but were it not, then presumably there would be no reason to give the referral in the first place).
And the referral need only be something as simple as a weblink to my daily return postings, with the suggestion that their contacts "see for themselves."
How to find my posts
If you are at all intrigued by the concepts raised in this article, there are a number of ways that you can access my daily posts:
- As the title suggests, you can follow me on Twitter by following this link (@AlanJohnson_).
- I also post on (and contribute articles to) Seeking Alpha. You can follow me here to have access to my daily return postings.
- If you prefer LinkedIn, a copy of each post appears on my profile page. You can connect with me via this link.
- I also post my daily returns on StockTwits. Find me there via this link.