Taking Irrationality Out Of Investing

January 06, 2016

[This article originally appeared in our January issue of ETF Report.]

Gary StringerGary Stringer
Stringer Asset Management

In investing, you can think too big. What works for institutions doesn’t always pay off for the little guy.

“A lot of advisors say individual investors should try to act more like institutions,” said Gary Stringer, co-founder and chief investment officer of Memphis, Tennessee-based Stringer Asset Management. “But wouldn’t it be better if instead we adapted our investment methodology to acknowledge that we’re dealing with real people?”

Such is the thought process behind Stringer Asset Management (SAM), which blends modern portfolio theory and behavioral finance to create intelligent, globally diversified ETF asset allocations for financial advisors around the country.

The team originally began life as the internal asset management group at Morgan Keegan & Co., where they reviewed managers, mutual funds and ETFs, as well as managed portfolios for clients. After Morgan Keegan and Raymond James Advisors merged in 2012, however, Stringer and his team decided to go independent. Morgan Keegan signed up as SAM’s first client.

With Morgan Keegan behind them, they retained access to decades of research, a healthy asset base, and an established track record that went back to September 2008. “They were very supportive in helping us get started,” said Stringer. “Basically, we’re a startup that’s not a startup.”

What makes your approach to asset management different?
As investment guys, we’re firm believers in modern portfolio theory. MPT is a cornerstone of our investment process. But we also think it’s incomplete. Studies show investors tend to get about half the potential returns of the equity market, and even less in fixed income. We believe that the leading causes of that missed market opportunity are the mistakes we all make, the ones we’re all hardwired to make, because humans aren’t very good at dealing with financial markets. So we blend MPT with behavioral finance for a more retail-friendly solution.

How so? Would you give me some examples?
Sure. For example, retail investors don’t tend to do well with volatility. So we take a low-volatility approach, through the use of lower-correlation assets such as alternatives and so on, to help smooth the ride for folks. That helps people stay the course and increase the real return they can achieve.

We also try to avoid [very small] trades or positions. An advisor left to his own devices might put a 1% position into, say, Poland, because he thinks it’s a good opportunity. At the same time, he keeps the position small, because it’s risky. A small position size like that doesn’t really have a lot of impact on the portfolio. It does, however, create questions for the client.

If you meet with a client only a couple times a year, and you’re trying to focus on the big picture, and the first thing they do is flip to their holdings and see that their 1% in Poland got cut in half … suddenly that small position—which is not at all impactful for the whole portfolio—has derailed the entire conversation.

So instead, we try to cover the whole world with a balanced strategy using ETFs. That’s much more palatable for the individual investors and their advisors.

Are you primarily strategic or tactical?
Both, to an extent. We don’t take the institutional approach, where you do a mean-variance optimization and use all the assets all the time, just varying amounts. Instead, we take a strategic, three- to five-year view for the core of our allocation. Then we complement that with a 25% tactical allocation, where you’ll see more sector rotation, maybe, or specific ideas or individual commodities, etc. The strategic side keeps us on course, while the tactical element allows us to take advantage of opportunities or mitigate risk when we see the time and opportunity.

We also have developed what we call the “cash indicator.” This methodology signals to us the rare times when we should raise significant amounts of cash. We don’t do it often, because the more frequently you raise cash, the more frequently you end up being wrong. But there are times when you do want to be in cash. So the cash indicator serves as a circuit breaker, something to differentiate typical market volatility (like what we saw this past August), from something truly catastrophic (like the 2007-08 environment). It helps clients not act emotionally during times of duress.

Sounds like your whole philosophy is about helping clients not act emotionally.
Absolutely. A lot of folks say that institutions do better over time because they have a process in place, and shouldn’t we try to get individual investors to act more like institutions? But we turn that around. Wouldn’t it be better if instead we adapted our investment methodology to acknowledge that we’re dealing with real people? That, we think, is really the key to our success.

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