RACHEL MARTIN, HOST:
Look at any index of financial markets, and you can see pretty easily this year has been bad - bad for stocks, bonds, crypto, basically everything. So is there a way to navigate the volatility, or are we just along for the ride? Planet Money's Mary Childs talked to one fund manager with a strategy.
MARY CHILDS, BYLINE: There's a big divide between money managers who will say investing is the same as gambling and those who won't.
Can you tell me - do you gamble at all?
BEN TROSKY: Never.
CHILDS: Really?
TROSKY: Don't play games I know I'm going to lose.
CHILDS: In the '90s, Ben Trosky was a money manager, and the game he thought he could win was buying and selling junk bonds. The way to win was to beat a benchmark, to stay above this line that is always going up and down. The line represents what the whole market is doing, the junk bond market. He's not only competing against this line but also against a whole universe of other money managers who buy and sell junk bonds, too. They all get ranked, best to worst, every day, every year, every 10 years. And Trosky knows not to care much about the short term. Short time periods of a track record are meaningless. Trosky wants to be the best over the long haul, to be in the top 10%, the top decile, at the end of 10 years. He thinks he can because he came up with a plan.
TROSKY: When I did simulations, it became very, very clear that if you consistently stay in the top third but never end up No. 1, 2 or 3, that over time you would end up in the top decile of the competitive universe.
CHILDS: In this competitive universe, Trosky never wanted to be No. 1 in a given year's rankings because, in his scenarios, basically no one stayed on top because anyone in the top slot in a given year almost certainly got there by doing something reckless. They have to have taken too much risk, and they just lucked out. If they hadn't lucked out, they would have broken the most foundational rule of investing, which is to not lose money. To Trosky, it's better to take a lot of little swings all the time, measuring the risk against the potential reward, being picky, being strategic.
TROSKY: The idea of strategic mediocrity was my tongue-in-cheek title or name to put on the idea.
CHILDS: Strategic mediocrity. To do this, Trosky says he'd buy the safest junk bonds, not the riskiest stuff, and he'd do things his competitors weren't, like buying emerging market debt or pooled mortgage debt, which - and I know how this sounds - back then, it was actually less risky than it appeared. And finally, he would do enough research to understand every single thing about a company. And this is kind of textbook. It's something everyone says they do. But Trosky says he really did it.
So in the end, your strategic mediocrity, did it work?
TROSKY: It worked. You know, the Lipper survey of mutual funds, it was ranked the No. 1 fund for the 10 years I managed it.
CHILDS: Not just the top decile, No. 1. Not long after, in 2003, he retired. His strategic mediocrity had worked.
Mary Childs, NPR News. Transcript provided by NPR, Copyright NPR.
