Every year around this time, I do a good old-fashioned audit on what we got right, what we got wrong, how much of it was luck and what was behind the mistakes made.
Doing an honest self-appraisal can be a very useful exercise to improve future decisions that will have to be made. To help with this, here are three mantras that I try my best to factor into my analysis and, ultimately, our investment philosophy and thesis heading into 2023.
It’s good to have an opinion, but have the humility to recognize when it’s wrong
This is something you will rarely see among the many market strategists or talking heads on financial television who often double down on a mistake instead of owning it, learning from it and moving on. A way around this is to have actual skin in the game, because having hard dollars at work in the market keeps one very accountable for bad calls.
We find that keeping a logbook of your trades to look back on in order to discover where things went wrong and where they went right is a great starting point to help improve your performance and track record.
This way, with practice, you will have a better idea of whether or not there has been a structural change to your thesis while giving you the courage to recognize any errors, trigger losses and move on to better opportunities elsewhere.
Taking such an approach means you will end up doing more of what’s working and less of what isn’t. But most people end up doing the exact opposite. They allow their ego to get the better of them and try to prove the market wrong by averaging down and compounding their losses.
We read a great meme on this digging for non-existent treasure recently that goes: “Man digs 12-foot-deep hole without realizing his metal detector was picking up his steel toe safety boots.”
Be unconflicted and unconstrained
A long-only, sector-specific fund manager has no choice but to always be bullish on their sector, forcing them to ignore emerging unfavourable conditions as they arise.
That’s why being unconflicted and unconstrained can really help you to stop digging holes, which is exactly why we shuttered our energy hedge fund following the attack by the Organization of the Petroleum Exporting Countries on United States shale producers back in 2014. We didn’t like being in the position of being forced to own a sector we didn’t have conviction in at the time.
In today’s environment, not being constrained to the traditional 60/40 balanced portfolio really helps our performance because those portfolios have experienced their worst year since the 1930s.
We also boosted our energy exposure while many institutional pension portfolios were selling, and took down our fixed income to the lowest allowable levels while exploring new and innovative investments such as structured notes.
Don’t anchor to the past, focus on the present
It’s important not to let anchoring to a previous reference point influence your decisions today. For example, it may be tempting to look at a highly torqued cryptocurrency, technology company or related fund that is down 50 to 75 per cent from its highs and think it will bounce back and beyond. We prefer to research whether the environment backstopping these previous valuations has changed or not.
In this regard, the pervasive opinion is that we’re going back to pre-2022 conditions via ultra-low interest rates and inflation levels of less than two per cent. But central banks were late with their tightening, allowing wage inflation to potentially take root, which may make it very difficult to get back to positive real rates.
That isn’t to say inflation won’t fall back down, but what happens if it gets to, let’s say, four per cent and stays there, forcing the United States Federal Reserve to keep rates above this level? How will long-duration equities such as technology that depend on low rates to fund their growth be valued in such a scenario?
We think betting on a Fed pivot is not only lazy, but could also be very dangerous for anyone who finds comfort in those not willing to admit how it went so wrong to begin with.
It really helps being a goals-based portfolio manager since we’re not paid for our opinions, but for the ultimate performance of our client portfolios. That’s a mantra we have never forgotten and one that constantly motivates us to always do better, even if that means admitting we got some things wrong.
Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc, operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning.
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