In Search Of Audrey Hepburn?

• Macro matters: Too many investors ignore the macro environment, much to their detriment. We've just been through a long bout of "Euro-fatigue," which will surely continue as speculators now move on to attack Italian, Portuguese and Spanish sovereign debt. My friend told me that he sees this getting worse, pointing out to the jump in Italian bond yields as a bad sign for Europe's rescue plan. I remain more optimistic in the near term but must concur that Europe faces a long, tough slug ahead. As far as research, I recommended he subscribe to Wolfe Trahan & Co's research as I consider Francois Trahan to be one of the best strategists (along with others) in the business (he's more bullish nowadays).
  
• It's all about beta stupid!: One thing we agreed on is that pension fund managers spend way too much time worrying about alpha - - chasing hedge funds, private equity funds and commodity funds -- and not enough time worrying about beta which is by far the most important factor driving returns. Strategic asset allocation doesn't mean that pension funds should forget about beta. They have to play the ranges in each asset class more intelligently, taking appropriate risks when it's warranted. Pension fund managers should read my last comment on 'La Dolce Beta' and think about how they're positioning their portfolio. to be honest, they should have been thinking about this at the end of Q3, but most of them are reactive, not proactive, which is why they continuously get burned in these volatile markets. My friend told me when the S&P dropped to to 1150, he bought 1%, to 1050, another 15, if it drops to 850, he'll buy 2%. Whether or not you agree with these target levels and how he's buying is not the point, the point is that beta matters a lot and you have to have a game plan in these markets and play your ranges wisely in public and private markets (easier in public because it's liquid).
• Stop chasing alpha!: Another thing we agreed on is that pension funds are way too horny on hedge funds and private equity funds. One of the reasons that I predicted the 2008 crisis was because I saw the silliness first hand, with many pension funds investing in all sorts of hedge fund strategies they didn't understand, including highly levered illiquid strategies which have since died. And even in liquid strategies or relatively liquid, pension funds still don't understand return drivers. For example, in the case of convertible arbitrage, my friend told me "A lot of them were up 50% in 2009 following the crisis where spreads blew up, but it doesn't take a genius to understand that it's mathematically impossible to repeat that performance." Of course not, and that's all about "alternative beta" which I keep warning investors of.
• On Ray Dalio "Mastering the Machine": We also spoke of Ray Dalio and Bridgewater, which now manages more than $100 billion. I told my friend that I had met Dalio back in 2004 and warned him of deleveraging/deflation. I'll be honest, I like Ray Dalio and Bridgewater a lot, believe in his principles, especially principle #11, invested in his fund long before anyone really knew who they were but there is no way in hell I'd ever work for Ray Dalio because while i might thrive in that culture, I'd probably end up punching him in the face just like Ray did with his boss in the early seventies. Bridgewater has grown nicely, delivered outstanding returns but listening to Ray on Charlie Rose, I found myself agreeing with him and at other times wanted to smack him! Talking about the virtues of self-sufficiency is fine when you are part of the 0.00000001% of the ultra rich, but let's get real. Also, I have a problem with large hedge funds charging 2% management fees. My friend told me of a successful CTA now charging 15 management fee and no carry. As for Bridgewater, he agreed and told me that there is a high turnover as senior members get promised all sorts of lucrative bonuses "if they stay long enough" which never get delivered. "They see $100B AUM and think that's $200M in management fees, which they can get a cut of, but the reality is that it's still ray's shop and he gets to keep the lion's share of those fees 9which is only normal but a cause for concern as well for succession planning).
• On the stupidity of pension consultants: We talked about how hopelessly dumb most pension consultants are and the whole "cover your ass mentality," which permeates mostly US pension funds which have a terrible governance model. My friend put it so aptly: "In the early nineties, consultants were all over 'stocks for the long-run," and what turned out to be the number one asset class since? Bonds. Now, pension consultants are promoting liability-driven investing (LDI), steering pension funds into bonds at a time when rates are at historic lows." I agree but also feel that as long as the risk of deflation remains high, investors will do fine with bonds. The point is to take everything pension consultants recommend with a shaker of salt and start thinking more carefully about alpha and more importantly, beta.
• On China's 'imminent' slowdown: We both agreed that most investors simply don't get China and prefer listening to short sellers like Jim Chanos instead of trying to understand China's economy. My friend said something wise: " People in the West view China through the prism of western-style capitalism, and don't understand the prism of communism and how it works to produce goods and finance operations. Chinese banks are state run, so of course they'll get bailed out if something goes terribly wrong."
• On banks and nationalization: My friend sees more banks being nationalized in the developed world as a result of this sovereign debt crisis. He's also particularly worried of funding costs at some Spanish banks like Banco Santander, and thinks they might be in for problems when they can't access funds from their foreign subsidiaries 9because of regulations).
• On the sovereign CDS scam: We talked about how the Greek deal may imperil the sovereign CDS market, and both agreed that the CDS market is a big scam. Big US bank and insurance companies made a killing selling them but they were never going to be triggered. We'll see how the Greek deal impacts the sovereign CDS market but a lot of pension funds and hedge funds got burned. My friend told me that he's concerned when he sees "long-short equity funds shorting via the sovereign CDS market." Yikes!
• On underfunded pensions taking on more risk: Many underfunded pensions are taking riskier bets to make up for the losses of 2008. My friend told me that even Ontario Teachers, one of the best plans, is taking on huge unfunded risks, swapping in and out of all sorts of trades. "They have to do this given the untenable situation their members' pension plan is in." True, but it can all blow up in their face in a spectacular fashion.
  
• On the importance of health and staying positive: After our lunch, went for a nice workout at my gym. Love it. Focus only on back , legs and a bit of arms and shoulders. Want to open up my back and improve my posture. Told my friend that it's important to eat right, sleep, stay positive and focus on the future. Montreal's investment industry is a joke, which is why I want to entice big US pension funds to come and seed some our alpha talent (there really isn't much but there are some gems here worth seeding).
  

Now that I am partially physically paralyzed, and my options limited in a very tangible way, I find in some ways that my existence is easier to navigate. Living within some very real boundaries in fact affords a certain amount of freedom, as the structure imposed by a debilitating illness invites one to use that structure as the skeleton upon which to build a new and different life. I have been freed from the expectations of the working world, a world in which we are often defined not so much by who we are but what we do. Apart from that world, I am free to define myself, albeit within the limits imposed by my disease, by what exists within. Thus, who I am, rather than what I am, takes on the utmost importance.

Just as a gifted poet limited to the strict rules of haiku can create combinations of words that have the power to take the breath away, attempting to live a meaningful life within the strict confines imposed by illness has allowed me the chance to rise above my previous foibles and weaknesses, to strive for some measure of triumph in the midst of mounting adversity, to try to be a better me. That effort has allowed me to rediscover parts of myself that had long ago withered from lack of attention, and to reconnect with the person I was before the burdens of adulthood and its attendant responsibilities had tugged and twisted that fresher version of myself almost beyond recognition.

Make no mistake, I am not saying that this damned and detested illness has conferred upon me any benefit that I could not have conferred upon myself while healthy, given a dose of mental strength and fortitude that I was lamentably unable to muster. This illness, any chronic illness, is a curse, a vile and venal monstrosity that is the very definition of horrible. But despite this beast attempting to consume me, I can endeavor to rise above, to mindfully claim each moment as my own, and to control my emotions rather than have them control me, thereby creating my own reality and snatching it from the gaping maw of illness.

Sick or healthy, miserable or horrible, we all have but brief lives to live. Those of us with the misfortune of being saddled with illness are only too aware of this fact, our mortality laid raw before our eyes as our illnesses insidiously do their dirty work. This keen knowledge of the frailty of existence can and should be used as a great motivator to make the most of each day, to live each and every moment to the best of your ability.

This isn't to say that every sick person has to accomplish some kind of daily miracle; there are some days when the best of my ability amounts to lying in bed watching the Marx Brothers. It is often enough to acknowledge that time is fleeting, as my weakening left side constantly reminds me. While this knowledge can and does terrify, it can also fortify and strengthen the resolve to make damn sure that although illness may claim my body, it can never claim that spark of life that animates it and makes me, me.

The horrible and the miserable. Turns out we're all in the same boat. Might as well start rowing…

And so let me row over to the Big Apple in search of Audrey Hepburn (see Marc's wonderful and funny video below and a famous Hepburn scene from breakfast at Tiffany's). I might have progressive MS and struggle with discrimination and unemployment, but I am not alone and this doesn't define me as a person. I'm able to walk, weight-lift, write, analyze and live life to its fullest. I'm working hard on not letting anything or anyone suck away my beautiful energy. I'm proud of my accomplishments and thank people like Marc for sharing the simple beauty of life with me and many others, putting it all into perspective. No matter what adversity you face in life, keep on rowing, the beauty is in the journey, not the final destination.