Career Risk Driving The Bull Market?

October is the month that professionals starting thinking about risk– not necessarily portfolio risk, per say, but rather career risk. In investing, the professional game is not so much risking client assets to deliver performance above the crowd. The reality, GMO portfolio manager Jeremy Grantham notes, is that “the ultimate job description becomes ‘keep your job.’” To Raymond James Chief Investment Strategist Jeffrey Saut these “sage words” are endemic and “are particularly cogent now that we have entered the month of October.” But that doesn’t mean that stocks are expensive just because a herd mentality might be the result of bowing to the demands of career risk over investment risk.

It can be argued that it doesn’t pay to stand out in investment management. Outsized investment returns on a consistent basis are often questioned by professional allocators. And it is often the fund manager who takes a risk and loses that is the one who is on the street looking for a new career.

So why take career risks?

Jeremy Grantham, portfolio manager and co-founder of GMO, notes that traveling with the herd is what leads to portfolio management longevity. “Efficient career-risk management means never being wrong on your own, so herding, perhaps for different reasons, also characterizes professional investing,” he wrote, connecting dots to explain the phenomenon of following a trend that is not universally accepted. “Herding produces momentum in prices.”

Saut, in an October 2 report on “Career Risk vs. Portfolio Risk,” doesn’t disagree with Grantham on the point about career risk. “There is much angst regarding performance risk, bonus risk, and ultimately career risk (loss of job),” in investing he wrote. But it is Grantham’s second component of the thought to which disagreement is found.

Grantham says that because of career risk concerns and investor herding, this is pushing equity valuations “further away from fair value as people buy because others are buying. That, ladies and gentlemen, is a perfect description of what the professional money-management business has become.”