Tag Archives: investing

Three things you and I don’t know about Investing

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By Steve Lowrie, CFA

Special to the Financial Independence Hub

There’s never a lack of commentary on what we know about investing: or at least what we think we know. Experts and amateurs alike love to opine on the subject.

For a change, let’s cover three things we don’t know about investing, and how to use our “ignorance” to become better investors.

1.) We don’t know what tomorrow will bring

What’s money for? It’s for funding everything you would like to consume in your lifetime (and bequest to your heirs). The catch is, none of us knows exactly how our lives and financial positions are going to unfold. In “How To Think About Investment Risk,” Professor Ken French describes this risk as “uncertainty about lifetime consumption.”

Because we don’t know what lifetime risks we’ll be facing, or when we’ll be facing them, it’s best to build them into your investment strategy from the beginning. That way, you’re already as ready as possible when they do occur. It’s why we suggest maintaining liquid lifestyle reserves, balancing your portfolio between stocks and bonds, diversifying across broad market risks, and buying insurance to safeguard your most valuable consumables.

2.) We don’t know ourselves 

Another common blind spot is how often our subconscious thinking tends to drive our supposedly deliberate decisions. In his book of the same title, Nobel laureate Daniel Kahneman calls this “Thinking, Fast and Slow.” Fast thinking keeps us alive in an emergency. Slow thinking helps us solve complex equations. By realizing you’re usually thinking on two levels, you can build this into your planning, particularly when balancing risks and expected rewards.

For example, Kahneman describes how people are inherently loss averse: We usually hate losing money about twice as strongly as we enjoy making money. You can leverage this hidden bias (along with basic math) to create an appropriate investment balance between the risks and expected rewards you choose to invest in. For example, would you bet your entire life savings on a 70% chance of doubling your money, but a 30% chance of losing everything? Most people wouldn’t take that bet, as the downside would seem too severe.

By acknowledging our hidden “fast thinking” tendencies, we stand a much better chance of sensibly building its influence into the financial choices we face.

3.) We don’t know what we don’t know

Ever heard of “the Dunning-Kruger Effect”? It’s a fancy term for describing how people who are less familiar with a subject tend to be more confident about their understanding of it than someone who is an expert in the same.

This MindfulThinks video describes how the effect works by comparing a college basketball fan to an actual player. An ardent fan may believe they know almost everything about the game, while the player may feel they’ve only mastered half of its intricacies. Why the disconnect? The player’s deep, hands-on experience leads to a more realistic assessment of everything there is to know about the sport. In contrast, the fan is blissfully unaware of huge gaps in their second-hand understanding. Continue Reading…

Investing ― not Speculating ― in Growth

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Image courtesy Franklin Templeton; iStock

By John P. Remmert, Franklin Global Growth Fund

(Sponsor Content)

 

Growth stocks attract a lot of attention, especially when momentum markets take share prices to heartpounding new heights. But as growth investors ourselves, we think many investors may be missing the point.

A single-minded focus on momentum is little more than speculation. If you want to invest in growth, rather than simply speculate, sustainable earnings are the key to unlocking value.

Stocks are the longest-duration assets in the capital markets. It may be several years until a stock’s value is fully realized, and as the COVID-19 pandemic has starkly reminded us, a lot can change in the meantime. We think it’s important to develop a mindset with a long time horizon and we seek to own the stocks of attractive companies that will benefit from the secular shifts that we think will shape the fortunes of businesses for many years to come.

Technology crosses all sectors

Technology is increasingly at the core of every business, not just those in the technology sector. If anything, the COVID-19 pandemic has simply sped up adoption of existing trends like ecommerce, machine learning and big data analytics. Health care, especially drug discovery, has surged forward with the rise of machine learning, like the biotech company we’ve owned for years that is now at the cutting edge of COVID-19 drug treatments with an antibody therapy that could help reduce symptoms in severely ill patients.

Within the information technology sector itself, we have invested in many US companies, as they tend to be global leaders with good corporate governance. But when we look at the pervasiveness of technology in other sectors, we find great opportunities in other countries and regions, like the South American stock we bought 10 years ago when ecommerce was non-existent; today the company is a market leader in ecommerce and has developed its own payment and shipping services to facilitate transactions.  Or the education company in China that was able to quickly move their business online when the pandemic hit, because they had been methodically investing in their online offering for years.

Supply chain links surprisingly strong

Although the pandemic and global trade tensions have put supply chains in the spotlight, in the long run, globalization still produces the best products at the cheapest price for the consumer. Continue Reading…

Should investors “go defensive” in uncertain times?

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Lowrie Financial: Richard Clark, Unsplash

By Steve Lowrie, CFA

Special to the Financial Independence Hub

Lately, the wisdom of having adequate cash reserves has been painfully hitting home for many investors. Sometimes, it has spurred attempts to fix the issue as soon as possible by “going defensive.” During this year’s booms and busts, investors have been asking me:

“With all the bad news, stock markets seem overpriced.
Should I sell some of my stocks and use the proceeds to become more defensive?”

Market-timing by any other name

You probably don’t remember, but back in 2018, we used a modest market downturn to remind everyone how important it is to have enough liquid cash to ride out market storms.  Today, let’s tackle how to create those comforting reserves to begin with.

There’s never a bad time to build more cash reserves or similar safe harbour holdings if your investment plan calls for it.  However, I would not advise reducing your position in stocks and going to cash simply because markets seem too hot to handle.  This is just another form of market-timing. 

Whether the strategy is successful depends more on random luck than evidence-based reason.

Here’s a powerful new video from Dartmouth Professor Ken French (the “French” in the Fama/French 5-Factor Model) with several reasons why this sort of market-timing is so difficult.  He concludes, “Most investors shouldn’t try to time the market.  When they do, they’re simply spending resources to move away from a better portfolio.”

 

 

Deliberately defensive investing

So, how can you shore up your cash reserves?  If you happen to receive a windfall of cash next week, congratulations!  Problem solved.  More realistically, you’ll need to extract the reserves out of your carefully structured portfolio, while keeping its overall asset allocation intact. Continue Reading…

Advisor’s Alpha

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By John De Goey, CFP, CIM

Special to the Financial Independence Hub

One of the great debates around the investing world revolves around the extent (if any) to which advisors add value.  Many in the media say the number is either small or negative. Many advisor cheerleaders say the number is substantial.  Everyone should be skeptical.  What follows is my unscientific assessment of the pseudo-debate (two opposing factions that have a story to spin where it is difficult to ascertain or refute either position).

The people at Vanguard have long been touting their own research (complete with quantified bandwidths for varying activities) on this topic.  Their general position is that advisors add about 3% in “value” to their clients’ portfolios.  Colour me skeptical.  To begin, it is possible to drown in a river that is, on average, only two feet deep.  Averages can be deceptive, especially when the variance in the things being measured is likely to be wide.  There is really no such thing as an average advisor or an average client.  Using the word “typical” might be a bit more accurate and helpful, but frankly, I doubt it.

There are some good advisors out there – and some lousy ones, too.  When I hear people talk about the suite of services that might be offered, the usual presumption is that all advisors are doing all those things.  That’s simply not true.  In short, almost any assessment of value added (say 3%) is likely to be truest only of the very best practitioners.  Only the very best are likely to be doing all the good things that cause advisors to score highly.  Ordinary advisors don’t do those things.  Poor advisors might very well be doing the opposite.

That’s my major beef, but there are others.  Remember that advisors are not monolithic.  They’re all over the place regarding what they do, how they do it and who they do it for.  Part of that is because their clients are all over the place, too.  Some are slothful to the point of it being difficult to get them to do anything; others are hyper-sensitive to media hype and short termism.  Good advisors provide focus and discipline, but that is difficult to reliably quantify and, at any rate, likely looks different for different clients.

Two counter-narratives

Allow me to offer two counter-narratives to the idea of (most?) advisors (consistently?) adding 3% over a long-term time horizon.  The first is the annual Dalbar study, the “Quantitative Analysis of Investor Behaviour” (QAIB).  Dalbar admits that while the study purportedly shows how investors can do unnecessary harm to their return by (among other things) chasing past performance, the people at Dalbar have no way of disaggregating causation.  Continue Reading…

The Covid-19 Fight: Round 1 goes to Fear, Round 2 to FOMO

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Photo courtesy Pikrepo.com

By Noah Solomon

Special to the Financial Independence Hub

Round One goes to Fear

Prior to the COVID pandemic, it had been some time since investors felt anything close to the level of fear that gripped markets during the global financial crisis of 2008. As global stock indexes plunged over 30% from their late February 2020 peak in little more than four weeks, media pundits and investment managers were predicting Depression-era scenarios.

Round Two goes to Fear of Missing Out (FOMO)

Just as investors were fearing the worst, the cavalry (primarily in the form of the Federal Reserve and the US Treasury) saved the day, unleashing an unprecedented amount of both monetary and fiscal stimulus. These initiatives gave a strong boost to risk assets, which were deeply oversold on a short-term basis. As markets initially bounced off their late March lows, there were few optimists.

As stocks continue to climb to within striking distance of their pre-pandemic highs, many investors have not only become less fearful, but have embraced the notion that stocks have significant upside potential over the near to medium term. Refrains of “Don’t fight the Fed” and “Powell put” have gained increasing acceptance and have caused many market participants to shift from fear to FOMO.

For What It’s Worth (this has nothing to do with the way we manage money … but we can’t resist)

If it turns out the worst is indeed behind us, this would be the first bear market that put in its lows within five weeks of its pre-selloff peak. After the dot com bubble burst, it took the S&P 500 Index approximately two and a half years to finally hit bottom in October of 2002, at which point it had declined 47% from its March 2000 peak. During the global financial crisis, it took the index about one and a half years from its July 2007 peak to finally bottom out in March of 2009, by which time it had suffered a decline of about 55%.

To be clear, we are not insinuating that the massive monetary and fiscal responses that have occurred are irrelevant or that, all else being equal, they are not positive for markets. But the trillion-dollar question is whether they justify the stock market’s 45% gain from its late March lows (in the case of the S&P 500 Index) and the halving of high yield bond yields.

Without going into an exhaustive list of positives and negatives, it is probable that markets have over-discounted good news while under-weighting potential risks. In our view, at current levels the odds aren’t in investors’ favour. There is a distinct possibility that the mighty market brontosaurus has been bitten on the tail, but that the message has not yet reached its tiny brain. This is not to say that markets can’t creep higher, but merely that the probability distribution is unfavourable.

Einstein’s Definition of Insanity

Regardless of whether you think that markets are going higher or lower over the short, medium or long term, what is clear is that the current level of uncertainty is elevated if not extreme. Continue Reading…

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