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No doubt about it, it's fall. There's a chill in the air, leaves are turning and supermarket aisles are overflowing with candy. Ghouls and ghosties will soon be parading down your street.
And when it comes to trick or treating, my two kids have taken very different approaches over the years ...
The oldest, who's always hated costumes, would don his at the last possible moment and strip as soon as the last Caramello dropped into his bag. He knew the costume was the price of admission, but he would work the loopholes hard - sling on an aloha shirt and a camera and go as a tourist, for example.
My youngest, in contrast, as a toddler HAD to wear the correct gear to match whatever video he was watching at the time. If you looked in his closet you'd have thought that he was a member of the Village People. To this day, he's happy to dress up, as long as it doesn't involve a tie and jacket.
But whatever their differences over Halloween costuming, both boys were in full agreement as to what constituted "good candy" (Snickers) versus "bad candy" (Smarties). And that meant that the trick or treating post-mortem involved counting and sorting (even graphing!) the candy to gauge each Halloween's performance.
Interestingly, as the end of the year draws ever closer, investors will be going through a similarly ghoulish process of "analyzing the haul." And here, as well, there will be little disagreement over what constitutes "good" vs. "bad" performance. However, not all bad returns elicit the same client reaction.
Guns N' Leeches
Generally speaking, bad performance falls into one of two categories: "Death by Smoking Gun" or "Death by a Thousand Leeches." Both are bad news (as an old colleague was fond of saying, "Mr. Market likes to give the maximum amount of people the maximum amount of pain"); however, smoking guns, deservedly or not, tend to be preferred by clients (more about why in a minute).
The smoking gun scenario is straightforward - a stock (or two or three) blows up spectacularly. The rest of the portfolio may be fine, but performance has been killed.
Death by leeches, by contrast, means bleeding 10, 20, 30 basis points of relative performance a day, for days on end. If it goes on long enough, the portfolio (and the business) can bleed to death. There's no obvious place to apply a tourniquet, and, unlike the smoking gun outcome, no obvious place to point a finger.
The leeches typically arrive in strong up markets, or when one or two sectors in the index are on fire (sectors in which one's portfolio is underweight, naturally).
