When I transitioned from a career in the chemical industry to investment management in 2007 I was at first surprised, and later appalled, at the lack of attention being paid to performance and continuous process improvement by retail financial professionals.

Even more astounding to me is the complacency with which investors accept this lack of attention. In what other industry does a consumer buy a product or hire a service provider without first having agreed on performance specifications and/or expectations?

Look at any mutual fund prospectus. What return (either absolute or relative) is the fund manager trying to obtain in the coming year? Chances are you won’t find it. What you will find are lots of historical performance data spanning several time periods, along with a disclaimer that these numbers have absolutely nothing to do with what you can expect in the future. And you’ll be given a list of risk factors – things that can go wrong and cause you to lose some or all of the money you invest. No commitments; only risks. Why would anyone buy a mutual fund under these circumstances?

Part of the answer may be that money managers, brokers, and financial professionals have gotten pretty good at dodging the performance issue over the years. They will explain the vagaries of the capital markets, uncertainty about economic growth due to unpredictable monetary and fiscal policy decisions, unknown global business and political factors, etc. But while all of this is certainly true, the point is that many of these managers aren’t even trying to measure and improve upon the effectiveness of their management processes.

But why not? After all, aren’t the uncertainties faced by money managers the same as those faced by manufacturing firms? Yet setting realistic and attainable targets, and responding to competitive forces by continuously improving operational processes, are hallmarks of well-run businesses.

When I formed Johnson Harper LLC in 2009 I believed then, as I do now, that there is a significant unmet need in the investment management industry for more rigorous processes and continuous improvement activities.

The task is certainly formidable. There is little published on this topic as it pertains to investment management, and so I have had to develop my own techniques based in part on my experience in the chemical industry. Along the way I have gone down many blind alleys, lost many clients, and ultimately have had to unlearn many of the generally-accepted investment theses I had been ‘taught’ over the years.

But I believe the effort remains worthwhile, particularly in the current climate of uncertain pensions, questionable social security retirement benefits, and the resulting need for future retirees (and we all expect to become one someday) to take greater ownership of whatever nest egg they are able to accumulate throughout their working years.

My latest activity in this ongoing effort is to begin posting on various social websites the daily performance of the investment portfolios that I manage. Because my clients have separately managed accounts, the values I report are Time Weighted Returns (TWR) aggregated across all client accounts and generated by the brokerage firm that I use.

Given that clients open and close accounts, and add and withdraw funds, time weighted returns provide a way to calculate investment performance by eliminating the impact of these cash flows into and out of the accounts. In this manner it reports performance solely attributed to the portfolio manager’s (in this case, me) actions. For more information about TWR, please see this link.

Each daily post includes the overnight return, the month-to-date return, and the return since I began doing this (inception date of July 1, 2013). The posts look something like this:

“Johnson Harper LLC consolidated TWR: 18-Oct daily = -1.02% ; MTD = -0.79% ; since 01-Jul-2013 = 6.00%”

Here are 8 reasons that summarize why I believe such postings can be of value, both to you and for me:

1. Posting keeps me focused on investment process and performance. A vice-president of one of the chemical companies I worked for once said, “If you want to lose weight, get on the scales every morning.” The discipline required to take the daily measurement of your weight reinforces the importance of the task at hand. Conversely, if losing weight is not important to you, then there is little point in weighing yourself each day. My investment process is extremely important to me, and I want to monitor it, and be prepared to adjust it, daily (particularly in these times of heightened uncertainty).

2. It provides a means by which investment process capability can be determined, thus allowing me to establish performance targets on the basis of this capability. Through the use of statistical quality control and statistical process control (SQC/SPC) charts, one can determine a) if there is a consistent process being employed, b) what the process is capable of producing (by way of an average output and variability around that average), and c) if the process is deviating from its control limits (i.e., is it becoming ‘out of control?’). The details as to how this is done, while straightforward, are lengthy and beyond the scope of this article (but I do intend to further elaborate on this in future articles).

3. Monitoring daily return performance can greatly shorten the time required to evaluate a manager’s performance. If you do an Internet search to find the time required to evaluate the performance of investment managers you may find links that discuss time periods such as 3 years, 13 years, and even 40 years — given these excessively long periods of time it’s little wonder that most investors just pick a manager and stay with him or her until forced by circumstance (manager retires; investor’s financial situation changes) to find a new one.

But one reason for these very long time periods may be the sampling frequency; if you measure performance once a quarter it will take longer to discern what’s going on than if you measure performance once a month. But this is a bit like weighing yourself once a quarter and then saying you must wait 6 years to determine if your dieting regimen is effective. If one assumes that a minimum of, say, 24 data points are needed to determine a statistically significant trend, then you would need 24 years of annual return data, 6 years of quarterly data, 2 years of monthly data, but only 24 market days (a little over a calendar month) of daily return data to assess the effectiveness of an investment process.

Granted, one month is admittedly a very short period of time but, say, 6 months of daily performance numbers would give you a much richer data set (about 125 data points) with which to make an evaluation. Why wouldn’t you do this?

4. Provides another benchmark for comparison. If you overlay the daily performance numbers I provide with the daily changes in your own investment portfolio (whether you manage it or it is managed by others), you can (over time) get a sense of three very important aspects of portfolio management.


a) How does the volatility of one portfolio compare to the other (‘beta’)?

b) Does one portfolio consistently generate a higher excess return than the other (‘alpha’)?

c) To what extent are the returns of the two portfolios correlated?

Quite frankly, if the volatility of your portfolio is lower than mine, and if you’re achieving a higher excess return, then there would be no reason to hire me as a money manager… And perhaps even a reason for you to become a money manager (assuming you manage your own investments and have the interest in doing it for others).

But I’ll elaborate on this topic as well in future articles.

5. The performance adds to (or detracts from) my credibility as a knowledgeable manager. By posting my performance on a daily basis I am, in a manner similar to the legend of Cortez, “burning my ships in the new world.” I’m motivated to succeed, because there is no going back. Either I can demonstrate a consistent management process with the potential for continuous improvement, or I can’t.

How many articles, media interviews, investment newsletters, and unsolicited snippets of “free advice” are you exposed to each day? And just how credible are these sources? Do these ‘talking heads’ actually accept the responsibility and accountability that goes with managing other peoples’ money (not as easy as you might think), or are they compensated simply for dispensing ideas, suggestions, and/or “expert opinion?”

The question I always want to ask is this: Rather than tell me how to become a successful investor, why don’t you demonstrate your credibility by reporting your daily performance in addition to the advice you are dispensing?

6. It sets an example for others to follow and, hopefully, to build upon. At the beginning of this article I criticized other retail financial industry participants for not trying to measure and report the effectiveness of their processes. I can’t say for certain at this point where my own efforts will lead, but I do get satisfaction from knowing that I am trying, and that I am willing to report my progress (or lack of it).

I am part of the baby boomer generation that will soon be faced with the challenge of not outliving their assets. This, in turn, leads to the challenge of understanding the concept of “portfolio drawdown” during retirement, which has as much (if not more) to do with portfolio fluctuations (i.e.,  volatility) as it does with average return.

I’d like to be part of a movement that takes a fresh look at these challenges and that can potentially provide investors with a higher degree of confidence in their ability to select investment alternatives that will allow them better control over their assets.

7. It addresses the question of “what was your return last year?” When I meet people and tell them what I do, I am invariably asked this question. There are both regulatory and ethical reasons for not engaging in a response. The primary reason is this: I do not manage a mutual fund; my clients have separately managed accounts. As such, their individual portfolio assets differ widely in size and, while they largely hold the same investments, they do not hold them in the same proportion as other clients may hold them. Thus, client returns can vary somewhat depending on the asset mixes in their accounts.

I prefer instead to discuss what I am trying to achieve in aggregate for myself and my clients, then refer them to my daily posts of overall TWR across all of the accounts I manage.

There are never guarantees, of course. And we are all told repeatedly that past performance is no indicator of future success. But I believe that tracking present performance can provide an indication of the existence, or not, of a process that can show indications of being within appropriate control limits.

8. Clients, friends, and colleagues can provide referrals with a greater degree of confidence. The social media website LinkedIn now allows members to “endorse” their contacts for various skills. While useful in theory, I find that I receive a lot of “endorsements” from contacts that, frankly, have little or no actual knowledge about my skill set.

I well remember in the early days of LinkedIn one of my contacts saying to me, “Alan, you’re a great guy and I like you a lot, but I have no idea how effective you are at managing money.” Posting my returns on a consistently updated basis (i.e., daily) begins to address at least a portion of his uncertainty about my skills.

Those that refer me will have some quantifiable evidence behind their referral (assuming, of course, that such evidence is positive – but were it not, then presumably there would be no reason to give the referral in the first place).

And the referral need only be something as simple as a weblink to my daily return postings, with the suggestion that their contacts “see for themselves.”

How to find my posts

If you are at all intrigued by the concepts raised in this article, there are a number of ways that you can access my daily posts:

  1. As the title suggests, you can follow me on Twitter by following this link (@AlanJohnson_).
  2. I also post on (and contribute articles to) Seeking Alpha.  You can follow me here to have access to my daily return postings.
  3. If you prefer LinkedIn, a copy of each post appears on my profile page.  You can connect with me via this link.
  4. I also post my daily returns on StockTwits.  Find me there via this link.

Once upon a time a group of 10 Canadians and 10 Americans chartered a fishing boat on the Niagara River just north of Buffalo. The current was mild and, despite the large number of boats on the river, the fishing was good.

As they drifted past Grand Island the Captain suddenly called out, “Hey, I hear on the radio that there’s a boat in trouble up ahead! It’s drifting dangerously close to the Falls”!

Continue Reading »

Note: The following is an article I wrote that was originally published by SeekingAlpha.com on February 28, 2012.  I am in the process of converting to Seeking Alpha as my primary publisher of articles.  I encourage all readers of The Reasoned Investor to register at SeekingAlpha.com and to ‘follow’ the articles I publish.  To find me at Seeking Alpha, simply select this link.  Then select the ‘Follow’ button below my photo on the left side. 

Last week I came across an article on Seeking Alpha with the intriguing title “How To Choose Your Own Probability Of Success.”

Because it was published just one day after an article I had written that suggested a very different probability (~34% vs. 20.77%) for the same stock on the same option expiration date, I felt I should both comment on the article and clarify my own views on the concept of “probability.”

Continue Reading »

It happens to me all the time.  Even some of my clients do it.  It’s not intentional on their part, and it’s even understandable considering the plethora of titles, designations, and certifications that exist in the financial services industry.

Someone will refer to me as a “financial planner” or a “financial adviser” or perhaps even a “broker.”  I refer to myself as an “investment portfolio manager.”

What’s the difference and why is it important?

Continue Reading »

The “Roundtable” portion of yesterday’s This Week with Christian Amanpour was so troubling that I feel compelled to bring it to the attention of those I care about. (Note: if you want to skip 20-minutes of McConnell and Clyburn providing their ideology and non-answers to Amanpour’s questions, scroll down to the “Roundtable: Debt Divide” video on the left side of the page).

Continue Reading »

I must be getting pretty good at investing — a couple of weeks ago I suggested to my wife that she move the equity portion of her 401k into cash, at least for the rest of the summer. … And she actually followed my advice!

In my view, if the old Wall Street adage “Sell in May and Go Away” isn’t true this year, then it will never be (assuming it ever was in the first place).

Continue Reading »

With so many things to be frightened of today, it’s hard to remember the things we were so frightened of in our past.  Now I’m not advocating that we dwell on past fears; the only reason I’m mentioning this is that (to paraphrase Mark Twain) most of the things we worried about in the past never actually happened.

There are certainly a lot of global economic concerns that might cause investors to get out of the equity markets.  So many, in fact, that it is hard to determine just where to place one’s investment capital if he or she does decide to exit the market.

Put options can provide a means by which downside investment losses can be limited while still being able to participate in upside gains.  Let’s consider an investment in the Japanese market to illustrate why put options could be of benefit to investors while they participate financially in the rebuilding of the Japanese economy.

Continue Reading »


Get every new post delivered to your Inbox.

Join 33 other followers