HYBRID VIGOR: VOL 2 ISSUE 40 "The Residue of Design"

If you’re a Mets fan (and I am), no matter what else is going on, things are good right now. And it’s largely due to the exploits of one Daniel Murphy. How does a guy go from being a career singles and doubles hitter to the second coming of Babe Ruth or Darryl Strawberry? How does a guy known for bonehead baserunning make the most heads-up play in years at the most critical time?

As usual, we’ll try to put something that has nothing to do with convertibles into
a convertible context. Let’s start with the fundamentals. You take someone who’s pretty good, but certainly not great, at their job. They grind away, year after year, with a mediocre group of co-workers. Then, finally, you surround them with some serious talent. Maybe the person feels threatened, loses confidence, and starts underperforming. It can happen to the best of us. Then again, perhaps the person feels more comfortable, because he or she no longer has to try to carry the whole team. Ironically, this state of relaxation produces better results, to the point where the player finally can take on that role when necessary.

It’s impossible to predict how changing the team will affect a given player. Getting the right mix goes by the name of management. So, let’s talk portfolio management, convertible style.

Part of the beauty of convertibles is you never know which of your players is going to be your star. You don’t really have to. You assemble a team—I mean, a portfolio—with certain expectations for each player, but you know up front that you’re going to be right with some and wrong with others. You just hope your rights do a lot more good than your wrongs do harm. Call it the Hippocratic Oath for portfolio managers. Fortunately, the convertible asset class is pretty well designed for that purpose.

So maybe a bond that you figured for perhaps a 5 or 10% gain ends up gaining 50% or more. Call it your Daniel Murphy. Put a solid player amidst a solid team and hope for the best. Hope may not be a trading strategy, as a former boss of mine once said. Then again, perhaps the greatest baseball executive of all time, Branch Rickey, told us that “luck is the residue of design.” Put a good team—er, portfolio—together and watch the pleasant surprises follow.

(This is the cover letter for the subscription-based weekly Hillside's Hybrid Vigor newsletter. For a complete copy, please contact John Anderson at + 1 (646) 712-9289 x 107).