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ETF's and Quants keep dropping dull knives

I found this essay regarding the relationship of corporations to social programs very interesting. Studying generational changes in socioeconomic relationships has always intrigued me. I can remember my dad chastising me for working for three different companies over a 5 year period. He was approaching 30 years working as an aeronautical engineer for Lockheed, and most of our relatives in Michigan were approaching like employment tenures. It comes as no surprise that a few of them worked for the same company as their parents. I used to joke with him that seven is the new thirty. Nowadays three is the new seven, and soon one may be the new three. A number of factors have contributed to this. Computers eliminating location as a variable. Corporations replacing defined benefit plans with defined contribution plans. Later household formation. These are just a few of the factors.


I found myself wondering if this evolution mirrored changes in the way equity portfolios are managed. In my previous post, I briefly touched on quantitative investing and exchange traded funds. 50 years ago, Graham and Dodd's Security Analysis was the bible of equity analysis and portfolio management. Most investment philosophies and processes were based upon fundamental analysis. Primary focus was on the operations of the firm, and the

cash flows that were available to the shareholder. Obviously price appreciation was a goal, however that was secondary to the anticipated cash returns on investment. Today, it is all about price appreciation. There is very little connection between companies and their shareholders, much as there is lacking in the employee/employer relationship. I am not abdicating for going back 50 years, however the recognition of such changes is invaluable in managing portfolios. This environment explains why a stock like PVH Corp can trade from 89 to 70, to 90 over a 5 week period, or Greenbriar Companies from 29 to 22, to 29 again. Understanding the underlying fundamentals of the businesses and industries becomes a weapon in this environment. We can't see ahead of time the wave of selling generated by non fundamentally based strategies, however we can sure know when the selling has become excessive and creates and opportunity. Fairways and Greens!

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