One of the main misconceptions about the Belmont Stakes—though it’s been partially exploded in recent years—is that because it’s such a long race, it must be beneficial to save all your energy until the end and then make a big late run.
But if you want to see the right way to win the Belmont, just watch the clinic that American Pharoah put on Saturday. Get good position early and then just keep grinding out steady quarter-mile segments. He could have gone around again.
A similar logic applies to convertibles and helps explain why long-term convertible performance has been so good, almost regardless of the time period you use. It’s not about a flashy display of speed, it’s about grinding out reasonably steady returns with a minimum of slip-ups.
We’ve designed our HOCS methodology accordingly, favoring bonds in the “sweet spot” of convertible pricing and emphasizing the factors that give convertibles’ risk/reward skew the best chance to work.
A couple of years ago I spoke with a client who was frustrated with the process of initiating a convertible portfolio because he was concerned with the time it took to get fully invested. “If I decide to be in the market, I want to be in today. I can’t afford to miss out on performance,” he said. I recommended that he stick with trading Spyders if that was his top concern. Rushing a convertible execution, I told him, could easily cost a good portion of the short-term performance edge he was so concerned with.
If you’re running a five-furlong investment race, convertibles may not be the thing for you. But in horse racing, five-eighths of a mile is not the test of the champion. Investors who want to succeed for the long haul need to pick the right asset classes and manage them accordingly. Convertibles, with the right jockey aboard, get the trip.
Hillside Advisors congratulates American Pharoah and everyone involved, especially
our friend Victor Espinoza, who enjoys playing the stock market when he’s not riding champions. Perhaps this will be the year I finally convince Vic to buy some convertibles!
(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).