Gatsby believed in the green light, the orgastic future that year by year recedes before us. It eluded us then, but that's no matter -- tomorrow we will run faster, stretch out our arms farther. . . And one fine morning--
So we beat on, boats against the current, borne back ceaselessly into the past."
-The Great Gatsby, F. Scott Fitzgerald
Whatever heights we may ascend, we remain forever drawn from whence we came.
So two weeks ago, the sports world held its collective breath as Lebron James announced his return to the Cleveland Cavaliers.
Four year prior, James severed ties with the Cavs' inept management in hopes of sunnier days in South Beach. Four championship appearances and two titles later, the King will return to Northeast Ohio.
Amid the sound and fury surrounding The Decision II, we identified four correlations between the machinations surrounding the NBA's biggest name, and the dynamics within the U.S. stock market.
Highs and Lows
Every endeavor worth pursuing involves highs and lows. Emotionally. Professionally. The means by which one responds to those junctures, be they positive or negative, will ultimately determine an outcome's success, or lack thereof, each and every time.
After leading the Cavs to four playoff appearances including a trip to the finals in which they lost to the Spurs, Lebron grew tired of Cav's owner Dan Gilbert. Specifically, he tired of Gilbert's lack of vision and inability to provide the complimentary pieces necessary to win a title.
For seven years, Lebron succeeded while carrying a cast of characters more reminiscent of the Washington Generals than an NBA championship team. Gilbert, putting all of the team's hopes on the shoulders of his star, never delivered so much as a back-up scoring threat. Frustrated, Lebron analyzed the situation, appraised his options, and chose to be proactive in dictating his future circumstances.
James could have played the hometown hero. Always falling just short because to the ineptitude of those around him. But, that wasn't his style. Even at his emotional nadir, he knew his value. And so he opted to play for a more capable, savvy and experienced management team in Miami.
Likewise, investors were collectively depressed and traumatized by the events of 2008. On the advice of their advisors, many had simply held on to portfolios that didn't stand a chance. Failed to get proactive as financial markets deteriorated. Watched stoically as their nest eggs were eviscerated. Even as their advisors admonished them to "stick with the plan."
Problem was, there was no plan -- at least not one that benefited investors. There were, however, empty words and a "buy-and-hope" methodology meant to simplify advisors' lives. Help advisors avoid tough decisions. To avoid the creation of a genuine investment process.
Much like Dan Gilbert's plan enhanced his financial circumstances without improving the team's championship odds, advisors had adopted a lackadaisical course that prioritized their needs above those of clients.
Have a Plan
When Miami Heat general manager Pat Riley first approached James in 2009, he had no
intention of obsequiously fawning over the NBA's best player in order to woo him to South Beach. It was immediately obvious that Riley, a proven champion in his own right, had a plan. One that entailed building a compliment of experienced, talented role players willing to integrate their skills with, and defer their egos to Lebron's in pursuit of NBA championships.
Impressed, Lebron bought in. He had never played within a strategic framework. His high school team, AAU team, even his seven-year stint with the Cavaliers - had all entailed one simple idea. Feed the ball to Lebron so that he could score and win.
Problem was, when James' teams came up against talented, disciplined, tactically minded squads, they often employed strategies focused on shutting Lebron down. For they knew that if Lebron was held in check, the compliment of players around him were not capable of winning.
Consider the 2007 NBA championship pitting the Cavaliers against the Western-champion San Antonio Spurs.
Coming into the game, everyone knew that James would be the best player on the court. Accordingly, he would likely lead the Cavs to their first championship. Only, Spurs coach Greg Popovich new better.
The Spurs employed a systematic offense that highlighted the talents of their three stars, Tim Duncan, Tony Parker and Manu Ginobili. Further, they employed a crushing defense designed to prevent Lebron from taking over games. It proved effective. The Spurs slowed down Lebron. The other Cavalier players failed to step up. And the Spurs routed the Cavs in four straight games.
In Miami, Riley assured Lebron that he would be able to trust upon his team to win games. That he would no longer be a one-man show. Riley laid out his plan. As well as the strategies and tactics designed to win championships. Lebron loved what his saw. Joined the Heat. Won two championships in four years. All because Pat Riley had a plan.
Similarly, investors must have a plan catering to their personal circumstances and designed to achieve their personal objectives.
Following the 2000 to 2002 bear market, the Wall Street Brokerages recognized the need to change their business models. They would no longer train brokers to customize each
individual relationship to meet the personal needs of each client. Instead, they would retain the appearance of personalized relationships, while training brokers to employ generic, turn-key strategies that fit each and every client.
These mass-production strategies appeared effective as markets rose. Brokers were able to allocate client capital to a set array of mutual funds or money managers which would track the market. Enabling Wall Street's sales force to frenetically market its wares to potential clients, attract new assets under management (AUM), while paying scant heed to the attainment of real, personalized life goals of existing clients.
Clients, realizing that personal finance was not a strength, accepted the idea that allocating capital to a handful of investments and hoping for the best was a plan. Until the 2008 credit crisis revealed the ugly truth.
Process is Paramount
Throughout 15 years of competitive basketball, Lebron had acclimated to being the offensive and defensive centerpiece for every team on which he played. His coaches, realizing the vastly superior talent he possessed, knew that they would win, so long as Lebron was on the floor. Quite simply, when superhuman talent competes against human ability, little strategy is required.
Skipping college and going directly to the NBA, Lebron was still dominant. His physical strengths and on-court skills were simply that good. Yet, James quickly realized that he could no longer single-handedly determine a game's outcome in the NBA. The competition was too tough.
Cavalier's coach Mike Brown attempted to develop an offense that took some of the pressure off of Lebron. But, the portfolio of players around him were simply not up to the task. Time and again, Lebron and the Cavs fell short of their championship dreams.
The Miami Heat, however, were coached by Pat Riley protégé Eric Spoelstra, who recognized that the greatest of NBA players had required a system that enabled teams to leverage that greatness, while providing complimentary assistance along the way.
That said, Spoelstra developed an offense predicated on explosively attacking the lane. This permitted the team's sharp shooters to spread the offense out, and stretch defenses thin. Accordingly, James, Dwayne Wade, Chris Bosch, or any of the Heat players could drive to the basket and choose to take the shot or, if the defense collapsed on them, kick the ball out to a compliment of sharp shooters waiting on the wings.
Combined with the leagues' most tenacious defense, the Heat had a recipe for success that overwhelmed the average opponent. Permitting them to play in four NBA championships in four year, winning twice, and fulfilling Lebron's championship ambitions.
Yet, process and methodology are not strictly the fare of realms like professional sports. Every walk of life is enhanced by a proven process capable of minding the details, endeavoring towards the attainment of goals, and mitigating risk whenever possible.
In 2008, as advisors pleaded with clients to "stick with your plan,' investors increasingly
saw that their plans were nothing more than ploys. Plans that worked in good times, not in bad. That enabled the broker to collect an annual fee for doing little more than allocating capital to third party managers, then discussing the merits of these funds or managers twice per year.
As stocks plummeted, and client portfolios dropped dollar for dollar, investors realized that their brokers had no more an investment process than they did a means of protecting their clients' downsides.
Suddenly, all the pithy aphorisms long used by brokers sounded like suicide pacts.
"I don't know where stocks will be in three months, but in three years, if we patiently ride this out and stick to our plan, you will be fine."
Only, these suicide pacts were one way agreements, as the brokers were often investing their own capital in ways completely different than the auto-pilot portfolios utilized for clients.
There were no risk mitigation strategies. No means of preserving capital in desperate, panic-driven markets. Just empty words on a phone line that did nothing to preserve the nest eggs cobbled together during the course of a lifetime.
Management guru Dr. W. Edwards Demming often said, "If you can't describe what you are doing as a process, then you don't know what you're doing."
By January 2009, investors realized that their brokers had little real idea as to what they were doing from an investment standpoint. Unfortunately, the damage had been done.
Reversion to the Mean
Following the 2013-14 NBA season, and a soul-crushing loss in the finals to the San Antonio Spurs, Lebron James contemplated a change.
Miami had been good to him. He loved played with close friends Wade and Bosch. The Heat's leadership, namely Riley and Spoelstra, possessed excellent basketball minds as well as big hearts. James had fulfilled his championship aspirations.
Yet, James' family, friends and heart remained in Northeast Ohio. His Miami experience had enabled him to grow. As a player. And a human being. He now realized that the fulfillment of his ultimate ambitions did not involve winning more championships in South Beach. But bringing one to his hometown.
He would return to the place he'd begun. His life. And his career. Even given the difficult circumstances under which he'd departed Cleveland, the wounds had healed. He could go home.
Lebron's decision to return to Cleveland underscored a central tendency in all established yet complex systems: reversion to the mean.
History. Psychology. Mathematics. Science. Each discipline is littered with examples of this principle. Similarly, the history of asset investment is replete with tales of mean reversion. Asset prices go up. Asset prices go down. Markets serve as a pricing mechanism for the underlying assets therein. All the while, investors are driven by the perpetual cycle of fear, ignorance, hope and greed.
When markets burn white hot, investors jump in head first. Committing capital at the most inopportune times.
When markets plummet, and fear permeates every motive, investors avoid assets that can, at last, be purchased for reasonable prices.
Yet, eventually every high and low reverts to the mean. The S&P 500 returns to its traditional price-to-earnings ratio of 15. Apple's price-earnings-to-growth ratio normalizes to 2.25. Students of the market understand this. Which enables them to think calmly when markets rise parabolically. To remain sanguine when hysteria reigns. To avoid the poor decisions that doom investors to repeat the same bad decisions over and again. From the days of bartering in the markets aside the Roman Coliseum, to today's trading pits within The New York Stock Exchange.
Everything eventually returns to its proper historical place. That nieghborhood, trend line, home or birthplace at which one was meant to reside. The place to which prices, valuations or the human heart must return.
Be it a stock price, an index, a political system, or a young boy from Akron Ohio.