Wednesday, December 11th, 2013
owners and renters

You bought some shares in a company on Tuesday.  I have a question:  Are you an owner or a renter?

Technically, assuming you haven’t flipped them already, you are an owner — of the shares and therefore of some portion of the company in question.  But are you really an “owner”?

I ask because the market is full of renters and there aren’t that many owners.  The reasons for your purchase — and your expectations going in — say a lot about which category that you fall into.  In that regard, my question is a bit reflective of a CFA Institute forum I participated in last summer on “investing versus speculation.”research puzzle pix | This posting includes a chart about one exchange during that forum and includes links to it.  (Since we are dealing with semantics here, notice the difference in the two words used for the debate.  “Investing” is a verb, signifying a process, whereas “speculation” is a noun, representing a thing.  A loaded construct.)

In any case, let’s think about different market participants.  A day trader?  A renter, by definition.  A high frequency trading operation?  Ditto.  Prop traders, technical traders, and tactical asset allocators?  Yes, yes, and yes.

Not that there’s anything wrong with that.  That is how they choose to play the game and I think they would deem my descriptions of them as renters quite appropriate.

But now consider an asset manager, let’s say a mutual fund manager.  This is where things start to get interesting.  Some of them are clearly owners.  By that I mean that they have a long time horizon and are fixated on the operation of the business and the value at which it is purchased.  You can expect them to vote proxies on their shares as an owner would and, tellingly, if they can’t find a stock to buy that fits their criteria, they are willing to wait.

They are a small minority.  With equity flows picking up again now, the first question many asset managers ask each morning is, “How much do I have to put to work?”  To be sure, they will buy shares of the companies they like the best, but they are playing a relative game in doing so, and are more renters rather than owners.

The statistics bear that out, as average holding periods illustrate that most managers get the itch to move every few months.  That’s what renters do.

At a meeting with an experienced portfolio manager recently, he talked about those quasi-owners as increasingly getting chewed up by others whose time horizons bookend their own:  the very quick (that pick off opportunities for short-term rentals) and those that take the long view — the true owners.

I was reminded of that discussion when I read a quote from David Swenson of the Yale endowment:  “The investment management world is a strange place in that the right solution is not in the middle.  The right solution is at one extreme or the other.  One end of the spectrum is being intensively active.  The other is being completely passive.  If you end up in the middle, which is where almost everybody is, you pay way too much in fees and end up getting subpar returns.”Above the Market | The quote was referenced by Bob Seawright in his fine blog.

Speaking of being stuck in the middle, Cliff Asness recently wrote, “a disciplined approach to value and momentum are both good long-term strategies, but you don't want to be a momentum investor at a value time horizon.”Financial Analyst Journal | Asness’ ten peeves about investing are worth the read.  You don’t want to confuse renting and owning.

Today we have a market where good economic news sends stocks down and bad news sends them up.  Asset managers obsess over the timing of changes to asset purchases by the Federal Reserve.  You don’t need much more information than that to know that the renters are firmly in control.

As I said before, being a renter is a perfectly legal (assuming no untoward activity) and acceptable way to participate in the market.  But beware renters that portray themselves as owners.

There’s a lot of that going around.