The best clients in the whole world don’t always enjoy the smoothest ride. Clients, I’m not trying to speak for your experience or tell you how you feel… but the ride has been aride, right?
A core of the households we serve has been with us 17 or more years! The story of our time together can be captured pretty simply, and you’ve heard this before.
“Buy low, sell high” and other classics have become some of our favorite principles: seek the best bargains in the investment universe, own the orchard for the fruit crop, and avoid the stampede.
Our formulations are a little contrarian, but they also aren’t that complicated. So what makes this commentary even worth making? Clients, you know the ride is a ride, and we’ve hung on together. The secret, then, is people hate being uncomfortable.
Buddhist teacher Pema Chödrön explains, “As a species, we should never underestimate our low tolerance for discomfort.” Strengths deepen and develop. Strength begets strength, success compounds. Those forces help us weather the tough times and keep perspective.
We’ll leave you with Chödrön’s take: “To be encouraged to stay with our vulnerability is news that we can use.”
Clients, need a check of perspective? Call or write, anytime.
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We’re contrarians. We are not satisfied with conventional thinking that portfolio management requires plugging in the right numbers and then following the formula.
It’s not that simple—and it can actually lead investors astray.
Here’s the deal. Modern portfolio theory—one version of the conventional wisdom—uses rigorous statistical models that attempt to quantify volatility and risk in their many forms. The idea is that if you can measure and predict volatility then you can construct a portfolio that has only as much volatility as you desire.
We believe there are a lot of problems with this approach. These models all rely on the assumption that the market will continue to behave rationally. So when the market experiences irrational exuberance, statistical models quickly lose their meaning and begin producing nonsense.
For example, one measure of a stock’s volatility is called its “beta.” The more correlated a stock’s movement is to the broader market, the higher the beta. A high beta stock tends to be a big winner or big loser based on what the market is doing, while a low beta stock generally moves less than the market. A stock can even have a negative beta, where it tends to move the opposite way from the rest of the market!
Under normal circumstances, volatile stocks tend to have a high beta. But when a hot stock gets caught up in a speculative bubble, it can take on a life of its own. A stock on a hot streak that goes up even on days when the market is down will show a lower beta than stocks that follow the market but may still be volatile.
In cases like this, investment managers that are chasing “low beta” may end up with some very volatile holdings in a portfolio that claims to prioritize stability and low market correlation. And investors that are looking to avoid the roller coaster of the stock market may find themselves on an even bigger ride without realizing it.
We believe statistical analysis can be useful, but it cannot compete with timeless investment principles. Trying to quantify volatility exposure can lead to ugly surprises when the underlying models break down.
We think there’s another way. Instead of trying to mathematically capture and avoid it, we believe in living with volatility. If you are investing for the long haul and you know where your cash flow is coming from, you do not need to fret about day-to-day price action.
Clients, if you have questions about this or anything else, please give us a call.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss.
We talk plenty around here about change, pain, and loss. They are a given in many activities, including owning a business, living, and having a human body.
Navigating pain, however, is easier when we’ve got some perspective about where we are. If we can understand more about the terrain, it’s clearer when we should be concerned versus when we should try to carry on.
Is this pain just “part of it”?
When a toddler is achy and crying during a growth spurt, parents have a chance to reflect that the screaming is just—to an extent—part of it. The kid doesn’t grow without some stretching and aching.
Is it “to-be-expected” pain?
Bending down to lace up new running shoes isn’t too bad. That first mile? Ouch. Some people feel the burn in their muscles and immediately interpret the signal as, “I guess I’m just not a runner.”
This is not a useful interpretation, given that the exercise is new terrain. Take some time to navigate it, and recalibrate: which pain and how much pain is to be expected for a new runner?
Is it acceptable?
This question is a little trickier. Only you know what you can stand or what you can choose to stand. We suspect you can handle quite a lot, but “tolerable” is relative.
Mean-spirited or toxic pain inflicted on our fellow humans? Not acceptable.
A growing pain? The pain of a shock? Maybe we’ve got a chance to understand it better—and respond rather than react.
Clients, we don’t know it all, but we’re happy to provide perspective where we can and try to understand where you are. Call or write.
We like to think we are glass half-full kind of people. We are all for due diligence and preparation, but we also remain optimistic that over time, the best possible things can happen. So how do we keep that spirit? The trick is knowing what you’re up against.
We have to be realistic about the problems we face. Sometimes when a problem seems insurmountable, it’s because it is. Volatility in the markets? You might as well fight gravity. It’s part of the deal.
It can’t be a problem because it can’t be solved.
Making sure you have the resources you need to meet your goals? That might be something that we can address—specifically, with some planning, strategy, and arithmetic. And honestly, some hope. If you don’t think your goals are possible, you’re probably right. There’s a world of difference between “Could I…?” and “How could I…?” We just have to stay open to possibility.
The alternative, we think, is pretty unbearable. We’ve watched too many friends waste away fighting things that were out of their control. What if their energy had been given instead to activities they could control? It’s the difference between years of soul-sucking labor and years of life-giving pursuit.
We want you to benefit from the best of our perspective. You might remember we’ve talked about this sort of thing before, as when we cautioned “Don’t Let Your Anchor Drown You.” We’re not promising a rosy path of puppies and rainbows, but we are interested in any outlook that serves us for the long haul.
The obstacles, the possibilities—we’re ready to face all of the above. Thanks for joining us.
Clients, if you’d like to talk more about what this means for you, call or write.
Michael Lewis’s book Moneyball turned 16 over the summer. In 2015, we wrote about the contrarian lessons we noticed in the Moneyball movement. The Oakland A’s won by using data to make roster decisions, favoring things like on-base percentage over batting average. Then, after the rest of the league adopted the A’s process, the 2015 World Series champion Royals won by bucking the trend and not following along.
We’ve found another lesson within Moneyball that applies to us—and you. Oakland A’s general manager Billy Beane rarely watched the product he helped put on the field to see how it performed. This may seem unusual (who wouldn’t want to watch baseball as part of their job?), but Beane had his reasons.
In a 2014 interview for the Men in Blazers podcast, Beane explained that he didn’t watch games because he did not want to do something about it in the heat of the moment. “When I watch a game, I get a visceral reaction to something that happens—which is probably not a good idea when you’re the boss, when you can actually pick up the phone and do something.”
Beane continued by saying doing something “probably isn’t logical and rational based on some temporary experience you just felt in a game.” This has meaning to us.
We all know that the market goes up and down, and we don’t find watching the ticker each second of the day to be helpful. Like Beane, we’ve strategically built our portfolios for performance over the long term (no guarantees), and we’re willing to ignore a hiccup from a star on occasion.
Like Beane, we can remove ourselves and our initial emotions from the equation. Then we can focus on only the moves to better our “team” and its goals in the big picture.
Clients, if you’d like to talk about this, or anything else, please email us or call.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
There is a quotation often attributed to Henry Ford: “If I had asked people what they wanted, they would have said faster horses.”
Biographers and historians have never managed to find any evidence that Ford ever uttered this statement, so it remains apocryphal. But the sentiment remains true to Ford’s reputation as a stubborn visionary.
For investors as well as consumers, sometimes there is a difference between what we need and what we want. We all want stability in our portfolios: why not? But stability often comes at a cost of lower income or growth potential. If you are sure you have all the money you will ever need, it makes sense to invest for stability. If you need your money to work for you, though, you may have to hold your nose and accept volatility.
If you really want stability, you can bury your money in a hole in the backyard. It will never grow, but you know that if you dig it back up you will still have what you put in.
The same is not true if you invest in volatile holdings. The value of your portfolio can and certainly will go down sometimes. As painful as that is, if you can afford to wait there is a possibility that it may recover over the long run.
If you just buried your cash in the backyard, there is no chance that it will suddenly produce more wealth. A long time horizon can smooth out the risks of a higher volatility portfolio, but it will not produce more gains from a more stable portfolio.
If we asked new prospects what they wanted, many would probably say they wanted stability. But that is not what we are selling. Not everyone has the same risk tolerance, and different amounts of volatility are appropriate depending on financial circumstances. We still generally think that learning to tolerate volatility may be more useful than seeking stability at all costs.
Clients, if you have anything to discuss, please call or email us.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.