The focus here is on a mutual fund manager. That is, the elf who makes the toys Santa will sell through major chain department stores and Amazon after every Thanksgiving. The fund manager is the one in charge of managing the investments, not the investors. Her boss is, in a way, the stock and bond market. And it's her enemy too—whether or not she is a good mutual fund manager or a bad one is based on how well she does relative to the market.
If she manages a portfolio that is marketed to investors such that it "competes" with just the S&P 500, then if the S&P is up 15% in a given year, and she is up only 12%, she sucked. Does she get fired for underperforming by 3%? Probably not. But there’s no fat bonus either.
That same gal the next year might be down 5%. And be given a huge bonus and be perceived as awesome. Why? Because the S&P 500 was down 18%. She crushed the market by 13%. She's a "bear market investor," one who does great in down markets and just barely keeps up in big bull markets. And that's just totally fine in MutualFundLand. This kind of investor is loved and has a nice long career ahead of her in the biz.
Today is a bad day, as Minnie Mufund strolls into the office at 6am. She works for a California based mutual fund, so she lives Wall Street hours, which play havoc with her social life at night (she turns into a pumpkin at 9pm) but gives her afternoons off since the market closes at 1pm California time.
Minnie awoke at 5am to check what was going on in Europe and the market was down huge—and she thought that the big down market would follow through into U.S. trading. She sighed and smiled and chuckled as she sweated on her Stairmaster watching Cramer shout nonsense on CNBC to retail suckers...er...investors who listened to him.
Why was she giggling as she logged in to her desk and computer systems at 6:03am? Because she was holding a portfolio with half cash, a quarter T-Bills, and the rest of the money invested in high dividend yielding stocks which tend to be cushioned in big down markets.
She was betting on this big fat downward spiral in the markets and knew that the highly unionized European employment system would be crushed by China and that the repercussions across the globe would be felt deeply. Her S&P 500 tracker fund was down just 2% year to date while the broader market was down 15% and she was giggling, wanting to begin to put money to work (it really never does sleep).
She checks her watchlist of stocks—a number of them have hit her price targets and now trade at 6.5x earnings with a 4% yield—and that's her "magic" number. She wants to start nibbling with a plan to put 10% of her portfolio to work today, maybe 20%. She fears there may be more selling off but that we are nearing a bottom in this market.
Here's her "fearful face."
She walks down the hall to check with the consumer cyclicals expert, chit-chatting about how many washing machines were sold last month—it was a down number, big disappointment; the market is fearing the worst. The headlines in the Wall Street Journal decry, “It’s Over – The Market Is Dead.”
And then she sits back and thinks, "Well, I'm not washing my clothes on a wooden board or a water polo players' stomach so I'll buy one again…some day.” And she notes that journalists are poor for a reason, one of which is that they are usually horribly awful investors, so one of her "tricks" is to do the opposite of what they recommend. And as she pores through other missives from influential bloggers and watches Cramer sweat more profusely on TV, she thinks that maybe she'll get 50% of her portfolio invested today.
Then the market suddenly drops another 2% and 2/3 of her price targets hit.
Others inside of her mutual fund shop have not been so well-visioned about this bear market. Some are throwing up. Some are crying. Some are packing their bags as they believe they will be soon fired. One guy who was down 36% year to date has already packed his things.
She walks into the trading room, which looks like a back room in a space shuttle with a list of 35 stocks that she wants her trader to buy with price targets. She hands him slips of paper and he begins to click away, buying lots and lots of shares. As she watches her portfolio go from a very defensive one, to a highly aggressive one, she just hopes that the world isn't dead and that the market goes up again…soon.
She communicates her bets via email to the entire investment group of 30 people, each of whom is a specialist in a given sector of the S&P 500, from energy to technology to real estate and banking. They all feel relieved that their "perma-bear" is finally getting bullish and that hopefully some of their pain will abate soon.
That bull does not look amused.
The day goes by in a blur—by the time everything is loaded into trading and communicated and then logged (all of her bets must be cataloged with a paragraph or three as to her rationale)…it’s lunch. That is, 10:30. Remember, she lives New York hours.
Lunch is delivered by her secretary and she hosts a few meetings from companies in town. These visitors are CEOs and CFOs who can barely stand to look at their stock prices. When she asks them why they don't just buy back their own stock, they stare blankly as if they hadn’t even thought of it. Their blank stares tell her that maybe they have reached a bottom and that companies will start buying back their own stock—or that business is so bad that they fear solvency.
"Oh well"—she has bought a ton of stock and has "made her bed." She will be long now, bullish from here. With such a big change in her portfolio, the senior management of the mutual fund company knocks on her door and ask her to explain the changes. She gives them her financial models and shows the trough profit margins that she thinks her companies will hit and that "everything has lined up finally to be very long the market."
Management likes the cut of her jib and tells her they hope she's right.
Stress. She just bet $4 billion on the market turning. Everyone in the shop followed her bullish moves—she is realizing that she has garnered great power inside of the org. Finished with her meetings and having updated her financial models (she’s a total wiz on Excel), she goes for a very long run at 2. There was only one company reporting earnings today—at 1:30, and they were awful. She didn't own their stock but made a note to check just how awful their stock had dropped for a maybe-tomorrow-buy.
Dinner happens at 5 with her off-again, on-again boyfriend—she travels a ton to see her companies, loves her job, just doesn't have time for a great relationship’s hours and worries that she'll die alone and rich. And asks herself, "Is this what I want?" as she turns in to bed at 8, knowing that she has an hour of paperwork to plough through before zzzz'ing.