Dave Canal's blog

For the past decade, the overwhelming and universally accepted narrative in the investment world has been, “no one can beat the market due to the 1% management fee.”  Nothing could be further from the truth.  The real cause of active management underperformance has been the high, and historically unusual, degree of stock market correlation.  It has been unprecedented. 

When I was young, I thought a business would last forever.  After all, J.C. Penny still exists and it’s a 114 years old.  But I was to learn, in 1973, why the saying, “Technology is a business that eats its young” was so true.  My understanding began with the initial public offering of Prime Computer.  It had a great business, but one that was to last for just 26 years.  That lifespan was very different than J.C. Penny’s.

If we could choose a genetic gift, most of us would probably choose to be a creative genius.   To be someone such as Elon Musk or Michelangelo would be perfect.   Or at least, we think it would be.   Who could not be happy creating something that didn’t exist before?   Unfortunately, this “gift “often comes with a heavy emotional price.  Creative people often experience addiction and depression issues.   But are these issues the cause of creativity or the result?  It’s not unlike the Alzheimer debate.

My first experience with the speed of light was as a young caddy.   As I looked across a fairway I saw a golfer hit a tee shot some distance away.   The player hit the ball, finished his swing, and then – what seemed seconds later in the hot humid air – I heard a CRACK sound.   I was puzzled.   At the time, I didn’t know the speed of light traveled 671,000,000 MPH which was dramatically faster than the speed of sound (761 MPH).   But I did experience it.   It was my introduction to something that would occur much later in my life, high-frequency trading.

We like to believe we control our conscious thought.  But I believe our subconscious – the “hard drive” part of our brain – is far more powerful.  It not only records our experiences but is utterly ruthless in the recall of anything which impacts us negatively.  My first business encounter with that was the day I received a U.S. Treasury certificate having a stated face value of $50,000.  That was an immense amount of money in 1966.  At the time, it was a period of rising interest rates … much as it is now.

The active manager cannot control his own destiny in times of high market correlation, but when correlation is a normal 26% - or lower - he can “hammer” the market.  Correlation is the degree that different securities move together in tandem.  The norm of 26% goes back close to a hundred years.  Sudden increases in correlation are always related to macro events.  The crashes of 1929 and 2008 are examples.  Both happened because of too much debt; stocks at 10% margin houses at 5%.

Today it might be hard to grasp, but when I was 21 there were clients who hired me because I was “a kid.” They hoped I would become “a gunslinger.”   Even in the 1960s, fear of the market still existed from the crash of 1929.  To be called a Gunslinger was an accolade applied only to the best money managers.   Of course, I wasn’t one of them.   But I did have two of the attributes; I was young and without fear.  Fortunately, for my new clients, I was under the spell of Robert F. “Pete” Lawson one of the first portfolio managers at Fidelity Investments.  

As I walked through a Baltimore hotel lobby, I heard someone call my name.  Startled, I turned toward the sound and saw a man coming toward me.   As I saw him, I remembered meeting him six months earlier in California.  His name was Bill Kling and he was the chief financial officer of The Cheesecake Factory.   As we shook hands, he introduced me to the man he was with, David Overton.  David was the C.E.O.

In our attached Capital Markets Overview, we share with you some thoughts on the 1st quarter and our outlook for Q2 and beyond. 

Like most people, I’ve heard the term "half-life" for years.  It always seemed to be used in reference to a prescription drug’s time of effectiveness.  So I was surprised when I heard it used by record executive Clive Davis about his business.  He had used the term to describe a song writer’s life span of creativity.  That reference got my attention.  I had always found it fascinating that creative people can excel at a particular craft and then suddenly they lose the gift.  Their journey is over.  They can’t write, sing, paint or act as well as before.  Ricky Nelson wrote about the experie