Inside Edge – special edition

 

This special edition of Inside Edge provides an overview of the videos, commentaries and Academy pieces published by EdgePoint in 2020. The next Inside Edge will be published on Friday, January 8th.

Short videos

Embracing the unknown: To achieve pleasing long-term returns, investors sometimes need to feel the discomfort of owning businesses that don't offer the short-term peace of mind that most of the market craves. This video explains why successful investors embrace times of uncertainty. 

Short-term declines: Short-term pullbacks in the market will happen, but they're only temporary. What matters most is how you react during these tough times. 

Bumpy road to long term outperformance: Everyone wants to outperform in the long term, but you can't do that if you invested like everyone else. In this video, we explain how looking different might mean short-term underperformance and how that's just part of an investment approach that can pay off over time. 

Worth your while – knowing the value of what you own: We believe that the best way to avoid falling into an emotional trap is to act like a rational business owner and differentiate between what the business is really worth versus what the market thinks it's worth. 

EdgePoint's investment approach: We believe the most valuable thing about us is the application of our investment approach. Our primary goal is making money for our investors but pleasing returns over the long term are more likely if you understand and believe in the EdgePoint investment approach. 

Commentaries

In 2020, our portfolio managers wrote about: 

• Uncertainty, and things we know to be true even in an uncertain environment (We understand the gravity of our responsibility to you – part 1) 

• Your path to point B and why you need uncertainty and willingness to look wrong in the short term to get to point B (We understand the gravity of our responsibility to you – part 2) 

• The high price that investors are willing to pay in search of certainty and why investors should crave uncertainty in investing (The certainty of uncertainty) 

• The rarely seen high-yield opportunities in the volatile fixed-income environment at the beginning of the year (Glass half full) 

• The risks in fixed income investing and the importance of fishing where best investment opportunities are (Fish where the fish are) 

• The changing outlook for fixed income and how you can ensure it plays the right role for you in the future (Play your part – the role of fixed income in your portfolio) 

• And what helped them sleep at night at the beginning of the year (What helps us sleep at night – Part 6) 

EdgePoint Academy: Planning for retirement 

A series of articles focusing on retirement, specifically on topics and issues faced by investors preparing to retire or already there: 

1. Are your retirement savings on track? Compound your money, not your problems. 

2. The big day has arrived: the right investments can help meet your income needs. 

3. The retirement income balancing act: the impact of withdrawal rates. 

4. Sequence of returns: a risk worth learning about. 

5. Your retirement preparedness temperature check.

This week's interesting finds

 

Borrowing more to pay more

Leveraged buyout (LBO) - A leveraged buyout is the acquisition of a company, either privately held or publicly held, as an independent business or from part of a larger company (a subsidiary), using a significant amount of borrowed funds to pay for the purchase price of the company. 

How much gas is left in the tank? 

FATMAN-G is Facebook, Amazon, Tesla, Microsoft, Apple, Netflix, and Google. Owners of these shares should consider that they own them at the current share price. A decision to hold the shares, or to not sell them - even if purchased a thousand percent ago - is effectively a decision to buy them today. Let’s say we are 30, have a three-year old and want to use our FATMAN-G investments to pay for college in fifteen years. Or maybe we are 50 and want our FATMAN-G investments to pay for our retirement at 65. Let’s also say we expect to make 15% a year in these great businesses. Sure, they’ve done much better than that historically, and these indeed are amongst the best businesses in the world, but let’s not be greedy, and just shoot for 15% a year. Let’s also assume that these great businesses will always have tremendous growth opportunities and thus instead of paying dividends, these companies will use excess cash to invest in those lucrative projects. 

The table above shows the market caps they would need to sport by 2035 in order to achieve our financial goals. Tesla would need to have a market cap of $6 trillion, Google $10 trillion, and Apple $17 trillion. And for each of them in aggregate to generate 15% annual returns over the next fifteen years, they would need a combined market cap of over $70 trillion. In 2035, that will be greater than the combined GDPs of the US and Europe. 

Interest rate sensitivity of major fixed income indices

Source: SunTrust Private Wealth Management 

Interest rate sensitivity is a measure of how much the price of a fixed-income asset will fluctuate as a result of changes in the interest rate environment. Securities that are more sensitive have greater price fluctuations than those with less sensitivity. 

Gamification

Robinhood Markets drew millions of users to investing with a colorful app that makes trading seem empowering instead of intimidating. That very appeal thrust it into the regulatory crosshairs yet again on Wednesday. Massachusetts securities regulators filed a complaint against Robinhood. It focuses on the tactics that Robinhood employs to keep consumers engaged, alleging that it encourages them to use the platform through what it calls “gamification.” One Robinhood customer with no investment experience made more than 12,700 trades in just over six months, according to the complaint. 

S&P 500 FY2 P/E ratio with and without Tesla

This week's interesting finds

 

Valuation of momentum

 

Demand for gasoline
 
While there is some seasonality in this, this is interesting given that the consensus was that this would recover a lot faster when we were in February/March. 

Trading can be addictive
 
Is the stock market a form of entertainment? Here is a story of a reporter signing onto Robinhood, the popular stock-trading app, to find out. 

“My editor and I decided that I should see what the fuss is all about. I started trading on Robinhood on Oct. 27, expensing my $100 investment. Any profits I made would go to charity; any losses would go toward public humiliation. I closed all my positions on Nov. 17. I never did any research; the companies would be just ticker symbols to me. Such insanely risky, wildly fluctuating stocks would either make—or lose—a ton of money. That was the plan. In the end, after three hectic weeks, I finished with $95.01. I’d lost 5% of what I’d put in. Counting the free stock I’d gotten, I was down 10.2%. Over the same period, the S&P 500 went up 7%” 

The lesson? 

You can’t invest without trading, but you can trade without investing. Even the most patient and meticulous buy-and-hold investor has to buy in the first place. A short-term trader, however, can make money—for a while, by sheer luck—without knowing anything. And thinking you’re investing when all you’re doing is trading is like trying to run a marathon by doing 26 one-mile sprints right after the other. To invest means, literally, to clothe yourself in an asset. That gives a stock the chance to work for you over the years it may take for a company to prosper. It also minimizes your tax bills—and your stress. 

Why do investor returns differ from mutual fund returns?

Why do Investor Returns vary from the profits of mutual fund houses? Investor Returns depend on: 

• When you made your investment 
• The price you paid 
• Your holding periods 

There are a few reasons why the mutual fund's returns are higher than your returns. 

Most people invest in the fund when the market is soaring, and they see the fund performing well. A well-performing fund has a high NAV. So, the investor buys at a high price. 

When the market reaches a low and the fund's performance drops, investors panic and sell. Optimism and despair control the investor's financial decisions. Situations lead investors to speculate rather than invest. 

Over the years, the retail investor's holding period has reduced. You do not benefit with reduced holding period as you are unable to reap the rewards of compounding. Exponential results are possible only because of compounding which takes time to work.

This week's interesting finds

 

Why did renewables become so cheap so fast? 

 For the world to transition to low-carbon electricity, energy from these sources needs to be cheaper than electricity from fossil fuels. The fundamental driver of this change is that renewable energy technologies follow learning curves, which means that with each doubling of the cumulative installed capacity their price declines by the same fraction. 

The learning rate of solar PV modules is 20.2%. With each doubling of the installed cumulative capacity the price of solar modules declines by 20.2%. The high learning rate meant that the core technology of solar electricity declined rapidly. The price of solar modules declined from $106 to $0.38 per watt. A decline of 99.6%. 

The made-in-Canada carbon solution we refuse to promote 

Replacing China’s coal with our liquefied natural gas (LNG) would be equal to taking 80% of all cars off Canadian roads. 

Exporting LNG to displace coal is a powerful way for Canada to be a leader in helping reduce global emissions. And yet one of the most perplexing barriers for LNG project sponsors is the fixation of Canadian regulators on the project’s domestic emissions, which are miniscule in comparison with their enormous global reduction. 

The impact of replacing coal with natural gas is clearly illustrated south of the border where it has helped drive down U.S. emissions by 14% since 2005. 

Stop sending pointless emails, the planet will thank you 

Millions of unnecessary emails sent every day, including those that say nothing more than “thanks” are a threat to the planet, scientists believe.

With the 2021 United Nations Climate Change Conference (26th session of the Conference of the Parties) taking place in Glasgow, Scotland next year, organisers are looking at innovative ways to cut carbon emissions — and the footprint left by web users has drawn its attention. 

British officials have been particularly taken by research suggesting that, in the UK for example, more than 64 million unnecessary emails are sent every day, pumping thousands of tonnes of carbon into the atmosphere owing to the power they consume. 

The carbon footprint of an email comes from the electricity that is used to power the devices on which it is written and read, the networks that transmit the data, and the data centres that store it. 

One piece of open source information referred to by officials relates to research commissioned by Ovo Energy last November, which suggested that if each person in the UK sent one fewer email a day it could cut carbon output by more than 16,000 tonnes a year. 

The research claimed that would be the equivalent of more than 80,000 people flying from London to Madrid. It found that the 10 most “unnecessary” emails included messages saying only “thank you”, “appreciated”, “cheers” and “LOL”. 

Americans of all ages are spending more on video games 

An interesting study showing where the increases in time spent playing video games has come from.

Older demographics are turning to games more often as they find themselves with money they can no longer spend on dining out or attending live events. 

Spending on video games for Americans 45 years old-to-54 years old increased 76%. People age 55-to-64 increased their spending 29%. 

How a once-dismissed idea became a leading technology in the Covid vaccine race 

Before messenger RNA was a multibillion-dollar idea, it was a scientific backwater. And for the Hungarian-born scientist behind a key mRNA discovery, it was a career dead-end. 

Katalin Karikó spent the 1990s collecting rejections. Her work, attempting to harness the power of mRNA to fight disease, was too far-fetched for government grants, corporate funding, and even support from her own colleagues. 

“Every night I was working: grant, grant, grant,” Karikó remembered, referring to her efforts to obtain funding. “And it came back always no, no, no.” 

By 1995, after six years on the faculty at the University of Pennsylvania, Karikó got demoted. She had been on the path to full professorship, but with no money coming in to support her work on mRNA, her bosses saw no point in pressing on. 

She was back to the lower rungs of the scientific academy. 

“Usually, at that point, people just say goodbye and leave because it’s so horrible,” Karikó said. There’s no opportune time for demotion, but 1995 had already been uncommonly difficult. Karikó had recently endured a cancer scare, and her husband was stuck in Hungary sorting out a visa issue. Now the work to which she’d devoted countless hours was slipping through her fingers. 

“I thought of going somewhere else, or doing something else,” Karikó said. “I also thought maybe I’m not good enough, not smart enough. I tried to imagine: Everything is here, and I just have to do better experiments.” 

In time, those better experiments came together. After a decade of trial and error, Karikó and her longtime collaborator at Penn — Drew Weissman, an immunologist with a medical degree and Ph.D. from Boston University — discovered a remedy for mRNA’s Achilles’ heel. That discovery, described in a series of scientific papers starting in 2005, largely flew under the radar at first, said Weissman, but it offered absolution to the mRNA researchers who had kept the faith during the technology’s lean years. And it was the starter pistol for the vaccine sprint to come. 

And even though the studies by Karikó and Weissman went unnoticed by some, they caught the attention of two key scientists — one in the United States, another abroad — who would later help found Moderna and Pfizer’s future partner, BioNTech.

This week's interesting finds

The "season for sharing" list 

Even though things are different this year, we’re keeping one of our favourite holiday traditions –
the EdgePoint gift list. 

We believe gift cards and presents from your local restaurant or a business always make a great gift, especially this year. 

Here’s what’s new in the 2020 edition: 

     • Where possible, we added local Canadian retailers in addition to Amazon links 

     • EdgePoint swag – A mask and long-sleeved t-shirt 

     • Recommendations of products made by businesses in our Portfolios 

We hope all of you stay safe during the holiday season. 

Calming investors’ market anxiety 

Morningstar conducted a study to understand how market downturns can affect investors’ decision-making. Specifically, whether particular pieces of advice from a financial advisor could differently affect investors’ engagement with the market during increased volatility. This study turned up three main findings: 

1. There’s power in seeing increased volatility as an opportunity. Most people preferred to either stay put or sell when they faced the story and historical performance conditions. Only when the situation was phrased as an opportunity did the majority of people buy additional stock. 

2. The active stay active. Across all forms of the experiment, participants who self-identified as active investors were approximately 2.4 times more likely to want to buy during a downturn compared with people who didn’t view themselves as investors. 

3. Emotions matter. Participants who reported experiencing positive emotions during the pandemic were more likely to purchase additional assets across all three forms of the experiment. 

These findings suggest that during a downturn it may be more beneficial to help clients reframe their thinking so they feel positive about investing, rather than to simply encourage them to purchase.

Vaccine research and development has improved massively throughout history

Below are the compiled timelines of vaccine development throughout history, from polio to swine flu, to demonstrate how the pace of research has evolved. 

Four valuation metrics using median S&P 500 Index data 

Plunging prices of cheese 

Cheese prices are plunging as Covid’s second wave drives diners from restaurants. The pandemic is forcing U.S. officials to yet again tighten their grip on eating out, and that’s cutting into prices for cheese and other dairy products across the U.S. Some wholesale cheddar prices have fallen more than 40% this month.

This week's interesting finds

This week’s charts

Reversal of equity outflows

The 60/40 portfolio duration risk has risen recently.

 

Global negative-yielding debt climbed to a record $17.1 trillion, as pandemic-spurred economic damage and monetary stimulus continued to grip bond investors even as news of progress on a vaccine lifted equity markets. 

The % of MSCI World stocks beating the index YoY is up to 39%. 

US equities are at their highest levels on record on a price to sales basis. 

Why value investing still works in markets 

Value investing, defined as buying or selling securities at prices different than their true value, is alive and well. You might not know that by reading headlines in the financial press or witnessing the poor returns of stocks with low multiples of price to earnings or book value per share. 

In recent decades, value investing has come to mean buying stocks with low valuation multiples and selling those with high multiples. However, simply buying stocks with low multiples should not be confused with value investing. 

One reason for the change in how people view value investing may come from Eugene Fama and Kenneth French, professors of finance. They published a much-cited paper which showed that adding measures of size and value to beta righted the relationship between risk and reward. Value investing suddenly became synonymous with buying stocks with low multiples and avoiding or shorting those with high multiples. 

Years later, many investors and market observers still unfortunately conflate value investing with the value factor. Value investing is buying something for less than it is worth. The value factor is an ersatz measure of gaps between price and value. Worse, the relevance of the value factor is fading.

Fundamental value investors should focus on gaps between price and value for individual securities. The present value of future cash flows, not misleading multiples, are the source of value. As Charlie Munger, Warren Buffett’s partner at Berkshire Hathaway, has said: “All good investing is value investing.” The value factor may be floundering, but value investing remains as relevant and useful as ever. 

The Big Lessons From History 

Harry Houdini used to invite the strongest man in the audience on stage. Then he’d ask the man to punch him in the stomach as hard as he could. Houdini was an amateur boxer, and told crowds he could withstand any man’s punch with barely a flinch. The stunt matched what people loved about his famous escapes: the idea that his body could conquer physics. After a show in 1926 Houdini invited a group of students backstage to meet him. One, a guy named Gordon Whitehead, walked up and started punching Houdini in the stomach without warning. 

Whitehead didn’t mean any harm. He thought he was just performing the same trick he saw Houdini pull off on stage. But Houdni wasn’t prepared to be punched like he would be on stage. He wasn’t flexing his solar plexus, steadying his stance, and holding his breath like he normally would before the trick. 

 The next day Houdini woke up doubled over in pain. His appendix was ruptured, almost certainly from Whitehead’s punches. And then Harry Houdini died. The riskiest stuff is always what you don’t see coming. Risk always works like that. In an interview years ago I asked Robert Shiller, who won the Nobel Prize for his work on bubbles, about the inevitability of the Great Depression. He answered: Well, nobody forecasted that. Zero. Nobody. Now there were, of course, some guys who were saying the stock market is overpriced. But if you look at what they said, did that mean a depression is coming? A decade-long depression? No one said that. I have asked economic historians to give me the name of someone who predicted the depression, and it comes up zero. An important lesson from history is that the risks we talk about in the news are rarely the most important risks in hindsight. We saw that over the last decade of economists and investors spending their lives discussing the biggest risk to the economy. This time it was the virus. Out of the blue, causing havoc we couldn’t comprehend.

This week's interesting finds

EdgePoint Videos: Embracing the unknown 

Do you enjoy not knowing what happens next? Other than suspense in movies, people usually prefer feeling like they're in control. But in investing, certainty and comfort are rarely any good. To achieve pleasing long-term returns, investors sometimes need to feel the discomfort of owning businesses that don't offer the short-term peace of mind that most of the market craves. Our latest video explains why successful investors embrace times of uncertainty. 

Latest charts on valuation 

After peaking at +4.5 standard deviations above the mean, the US large-cap valuation spread (the spread in valuations between the cheapest 20% of stocks vs the average stock) has reverted back down to +1.8. Historically speaking this is still a provocative starting point for value. 

The relative trailing P/E of value stocks: 

The relative trailing P/E of the Big Growers: 

After peaking at 5x the P/E of the market, the Big Growers now trade at 3.6x. Historically this group has traded at a relative multiple of around 1.5 – 2.0x. 

Source: Empirical Research Partners Analysis, National Bureau of Economic Research. Big Growers are a group of approximately 75 large-capitalization stocks classified by Empirical Research Partners, LLC to have faster and stronger growth credentials than the rest of the market. Trailing P/E ratios are equal-weighted and relative to the rest of the U.S. large-capitalization universe. 

Unravelling value's decade-long underperformance 

The tendency for value to lag markets for significant periods of time is not historically unusual, and happens whenever a market environment exists where expensive stocks get more expensive; cheap stocks get cheaper; or some combination of both (as we have seen this cycle). Over the past 50 years, it has happened three times in US markets - in the nifty-fifty bubble of the 1960s-early 1970s, in the 1990s dot.com bubble, and over the past decade. In other words, it has happened approximately once every 20 years or so. The only thing unusual about this cycle has been its length and magnitude, which has been somewhat worse than past cycles. 

One of the core reasons that value investing works is that investors systematically overestimate their ability to predict the future. 

A decade ago, investors believed Microsoft was being disrupted by mobile, Apple & iOS, Google Docs and Android. The stock traded for as little as 7x earnings at the time. Suffice to say investors' predictions of Microsoft's imminent demise (a value stock at the time, I might add - something today many people forget) were more than a tad exaggerated. The same can be said of Apple, which was losing money and widely believed to be heading for the bankruptcy courts in circa 2000 - again quite reasonably based on what was knowable at the time - and the stock accordingly traded for less than its net cash. We know how that ended. 

A century of quantitative evidence from market history suggests investors tend to underprice stocks with the most apparently assuredly poor future prospects, and over price those believed to have the most assuredly promising prospects, and there is nothing in the past decade's market experience to suggest that has fundamentally changed. 

What is the smart money saying? 

The impact of successful vaccine rollout on various sectors (“vaccine sensitivity”) 

What's happening with prices? 

While meat inflation (which spiked earlier this year due to supply bottlenecks) is off the highs, prices are still well above last year’s levels. 

And here we have the CPI for cleaning products. 

Fast-food restaurant prices are up sharply. 

Car prices are up. Especially used cars. 

You can buy men’s suits at a much lower price than last year.

This week's interesting finds

This week in charts 

The inverse weight of the Energy sector in the S&P 500 is the best and most consistent explanation of the market's P/E.

Will the election result be a catalyst to change the composition of the S&P 500?

1% out of “Growth and Defense” sectors equates to over 3% increase in Cyclical sectors!

Historically, volatility in the stock market is elevated in the months leading up to an election. This is logical, as the markets hate uncertainty. For investors, it’s important to step back, put personal feelings about politics aside, and objectively assess the situation and what it might mean for your personal finances.

Stock market performance leading up to an election has also been a major indicator of the outcome. The performance of the S&P 500 in the three months before votes are cast has predicted 87% of elections since 1928 and 100% since 1984. When returns were positive, the incumbent party wins. If the index suffered losses in the three-month window, the incumbent loses.

Tonight, we leave the party like it’s 1999

Today, U.S. stock valuations are at ridiculous levels against a backdrop of a global pandemic and global recession. U.S. Treasury bonds – typically a reliable counterweight to risky equities in a market sell-off – are the most expensive they’ve been in U.S. history, and very unlikely to provide the hedge that investors have relied upon.

This is the perfect time to look unconventional, just like in 1999. At today’s valuation spreads, the opportunity set is actually even better. And for those portfolios that are essentially benchmark-agnostic, we believe the opportunity set is the best we’ve seen in our working careers.

In 2020, the economy was destroyed by Covid-19; unemployment went from historic lows to historic highs in a matter of weeks. That should have reasonably dampened the market’s optimistic mood. But it didn’t (after the initial shock of March). The current valuation of the S&P 500 is actually higher than it was pre-Covid-19, which is dangerously odd given the sheer amount of uncertainty that exists (e.g., the shape of the economic recovery, the availability and efficacy of a vaccine, the risk of a second wave, U.S. citizens not adopting safety protocols, just to name a few). 

The real worrisome signs, however, are the increasing silly behaviors of a speculative market. Exhibit 7 is a prime example of the aggressive trading activity of retail investors. 

Though relatively calm for over a decade, this past spring awakened their animal spirits: daily trading activity increased nearly seven-fold over three short months. Bankrupted Hertz rallied 896% in May even though its own management team and the SEC said the company was likely worthless. Nikola, an electric truck maker with no actual earnings, no actual revenue, and…it’s true….no actual manufacturing facility to even make trucks, rallied 692% from April to early June. And then there was Tesla, which was bid up to $400 billion in market cap, making it more valuable than 12 established car companies, combined. The “You just don’t get it, GMO” taunts, the justifications, the mental gymnastics, the outrageous growth assumptions one needs to make to rationalize prices…it is all just too eerily reminiscent of 1999.

Americans have saved an extra $1.3 trillion since the pandemic

If household savings had grown in line with the recent pre-pandemic trend, Americans would have socked away about $2.2 trillion since the start of 2019. Instead, cumulative savings over that time period are worth just over $3.5 trillion. The difference—about $1.3 trillion—could pay for 9% of all the consumer spending that happened in 2019.

This savings boom had two basic causes. First, Americans cut their consumption dramatically. Part of what happened was that the higher-income people who were most likely to keep their jobs while working at home were also the people most likely to slash their spending on virus-sensitive categories such as dinners out and trips to the dentist. They were effectively forced to save because it stopped being safe to go out. Meanwhile, companies borrowed aggressively to offset the decline in sales while the government borrowed to offset the decline in tax receipts and pay for additional unemployment and welfare benefits. The net effect was that consumption spending fell almost 20% in the first wave of the pandemic.

Global energy consumption

Below are the IEA’s projections for electricity’s share of final energy consumption if countries stay on their current course (“Stated Policies Scenario”) and if countries meet the Paris Agreement goals (“Sustainable Development Scenario”). Under both scenarios, electricity’s share grows, but even under the Paris Agreement scenario its share is only 31% of total energy consumption by 2040. Under the Stated Policies Scenario it grows from 20% today to 24% by 2040.

Upstream oil investment needed to meet future demand

This week's interesting finds

Tracking the recovery

The recovery in consumer spending, especially in the low-income category, is now positive YoY, even though employment rates in that category are still down 20% YoY.

The slower recovery in consumer spending by the high income group has had a disproportionate impact on the low income workers living in higher income zip codes because the reduction in consumer spending hit businesses in those neighbourhoods hardest. As these businesses lost revenue, they laid off their employees, particularly low-income workers. Nearly 70% of low-wage workers working in the highest-rent ZIP codes lost their jobs, compared with 30% in the lowest-rent ZIP codes.

Consumer spending by income:

The policy efforts to date haven’t led to a rebound in spending at the businesses that lost the most revenue, and as a result, have had a limited impact on the employment rates of low income workers.

Consumer spending by industry:

Percent change in employment by income:

Percent change in employment by industry:

More on the recovery. 

The Q3 US GDP report noted that the downturn as a result of COVID-19 was led by services consumption which is usually the most stable component of GDP and is also seen as lagging in the recovery. Goods consumption is what’s driving the recovery. This shows how incredibly atypical it is and represents a sharp dichotomy in the economy.

From a policy perspective, if you stop imports, the goods recovery will flow through to employment from fixed business investment. But that’s not the case today.

The importance of entry price

Drawdowns over the past three decades.

Source: S&P Global Market Intelligence

Inflation

Inflation was +1.3% year-over-year in August, and +1.4% year-over-year in September. But here is the breakdown. 

A game of musical chairs

Active managers are under severe competitive pressure.  If they don’t perform they will be removed and the money will go to a passive option, or at least an outperforming peer. Therefore their desire to take significant risk away from the benchmark is low.  Active management has become like a game of musical chairs where it makes sense to hover close to the chairs at all times, rather than risk being at the other side of the room when one is pulled away. 

Allied to this defensive behaviour is the closely related problem of increased short-term thinking.  The threat that most active managers face of being fired tomorrow has profound implications for decision making, both for individual managers and their employers.  Is there any purpose in making a long-term investment decision if there is little chance you will be around to witness it come to fruition?  Indeed, making such farsighted decisions may well hasten your departure. 
 
Success in this game is based on the measurement of performance over increasingly contracted time horizons.  Investors in active funds and managers of them consistently talk about results in terms of days, weeks and months.  This is nonsense.  Financial markets are hugely unpredictable and chaotic, and discerning skill is incredibly difficult.  Over short-time horizons it is impossible.