I recently talked to one successful manager about how he was handling the continuing decline in the retail space in which he traded. Perry was typical of what I would consider a successful manager who had no shame in admitting that he was disappointed with his performance and 50 percent decline in overall P&L since the peak of his year in early June. He admitted that the mixture of the subprime mortgage decline, credit crunch, high oil prices, and bad weather had hurt retail sales and that he was basically treading water and trying to risk-manage his positions to keep his losses contained, waiting for the time when fundamentals would once again matter in the marketplace, thus preserving some firepower so he could get bigger in his high-conviction ideas. What I liked hearing was his candor in describing his stress and the fact that he had a methodology for containing risk, paring down his book and waiting patiently for the markets to recover. Perry illustrates what I would call mastery, the capacity to function fully in the world with the resources available to you.

If you were able to talk to your money managers, what would you want to ask them about their state of mind and their strategies for dealing with market downturns and portfolio drawdowns? In the following, I outline a number of things to look for when evaluating the performance of portfolio mangers and trying to coach them through difficult periods when they may be distracted by stress and veering ...

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