Lifetime Learning

Investing in the markets keeps you humble. The returns are hard to forecast. There are many risks to consider and measure. And your behavioural biases and those of investors as a group often get in the way of making the best decisions. I consider myself fortunate to have learned many great lessons from some of the best people, especially earlier in my career. I wish I could say that everything I learned was through avoiding mistakes and losses and making only big risk adjusted returns. But that isn’t the case, and it isn’t realistic. I also learned from my own mistakes as well as those made by others in the industry. This month I am sharing some of the most valuable lessons I have learned (so far!).

It’s Time Not Timing

I am sure you have heard about this before, but it is worth repeating, or even putting a sign with this above your computer. Successful investing is about investing in the market for the long term, not trying to time the ups and downs in the short term. Over the long term, a diversified portfolio will reward you with extra returns for taking on extra risk.

Volatility Is The Norm

The return of volatility this year is a useful reminder that returns in the public markets are not a straight line up. There is a reason that stocks and bonds, over longer time periods, have earned a higher return than a deposit in your bank account. It is to compensate for risk. That risk never goes away, it just ebbs and flows. And while markets can have extended periods of low volatility, you can be as sure as having a rainy day in Vancouver in November (and many other months) that it won’t last.

Diversification Not Diworsification

Having too few stocks means that you have a lot of company-specific risk. You can earn great returns if you or your advisor make excellent choices, consistently over a long period of time. But that is tough to do, and you leave yourself exposed to a few bad choices. For a diversified, actively managed portfolio you need enough stocks to ensure you don’t have too much company-specific risk. But you also don’t want too many stocks, otherwise you may as well own a low cost, broad market index ETF. I think that an actively managed portfolio in a market like Canada should own somewhere between 40 to 50 stocks across the industry sectors.

Market Analysis Not Paralysis

We are inundated with financial news and real time market prices. Media pundits are constantly trying to explain the changes in prices over the last few minutes, hours, and days. It is meaningless information to a long-term investor in a diversified portfolio. But the wiring of our brains makes it hard for most of us to resist this short- term noise, including yours truly. Too much short-term information leads to a narrowing of your perspective and therefore poor long-term decisions. I learned this the hard way.

Be The Sponge

Never stop learning. Remain curious. Follow thought leaders. Adapt what you learn to bolster your strengths and shore up your weaknesses. I am still working on all of this!

You Don’t Know What You Got ‘Til Its Gone

There are tools and techniques to determine your risk profile. Your profile should be measured from multiple dimensions such as your financial capacity to take risk, how you view the risk of various investments, the risk you need to take reach your goals, and your tolerance for losses. Despite the best efforts to measure risk profiles, I don’t think you know your true risk tolerance until you experience a period of significant declines in your investment portfolio.

They Don’t Ring A Bell At The Bottom

Forget about waiting to buy until the market has bottomed. The odds of timing that are against you. While it isn’t easy to average down (buy at lower and lower prices) during a falling market, it is a disciplined approach that will pay off in the long run, assuming you are buying a diversified portfolio. If you think you can wait until you see the market is consistently going up again, you will likely miss getting your money back in the market. From my experience and others, you will think the market shouldn’t be going up yet as the news and outlook will still be bad. Markets turn up before the news gets better.

All That Glitters Is Not Gold

Gold. Bitcoin. Pot stocks. SPACs. Meme stocks. Every couple of years there is a new, hot trend that you absolutely must not miss, at least according to the investment marketing crowd. But by the time a fund or ETF is launched for retail investors we are usually closer to the top of the price range and about to experience a dramatic fall in the next year or so. Don’t get me wrong, people do make a lot of money on the ride up. It is just extremely hard to get off the train near the top, and unless you were an early investor you usually end up with a loss. Trying to be contrarian and shorting these trendy investments is also hard, as usually they go up more than you expect. I try to avoid trendy investments, and ignore the stories of people making a killing in the bubble phase.

Putting It All Together

Given the huge amount of information that goes into the pricing of a stock and stock markets, it shouldn’t be surprising that investing is not easy. But stocks and stock markets have been around for a long time, and you can benefit from what others have learned through experience and research to make sure you have the right portfolio to reach your goals, and that matches your risk profile.

Invest Wisely,

Dave Schaffner, CFA

Principal, Wayfairer Capital Management Ltd.