I hope everyone has had a great spring so far! I just got back from our Worldsource conference in the Grand Caymans. I’m not sure if our PR department gave enough thought to the optics of having a financial conference in a country known to be a tax haven for the rich…. Still, it was a spectacular location, and I buried a couple of dollars on Seven Mile Beach, just so I can claim to have hidden some money in a tax-sheltered country!
I love getting together with some of the top advisors across the country. Not because I necessarily learn a lot but more so because I feel relieved when I realize that despite the collective wisdom of hundreds of years of experience in the industry, no one else has any idea what markets will do next.
My wife, Kristy, is a music teacher with about as much interest in the market as I do in singing along with her to the latest Broadway musical. But, 27 years of marriage to a financial planner means she has picked up some things along the way. She has decided that markets do well on Fridays, stocks go up on sunny days, and there is always a dip when we go away on vacation. I’m thinking of getting her to present at our next conference because it may be more valuable than the prognostications of the experts.
At the beginning of last year, I wrote about how we have never experienced interest rates rising as quickly as they had in 2022 without it being followed by a recession. By the end of the year, though, the narrative had changed as the explosion of Generative AI ramped up productivity to the point that there was an expectation of a “soft landing” in economic terms. Now, markets expected that lowered inflation would allow governments to cut interest rates without the pain of an economic contraction (recession).
Market prices today are always based on an expectation of where the economy will be in the next few quarters. At the beginning of the year, markets had “priced in” the expectation of a half dozen or so rate cuts over the next nine months. Sentiment shifted again in April as we had a couple of stickier-than-expected inflation reports, a cooling off in productivity bumps, and a run-up in energy prices that was exacerbated by Iran and Israel taking potshots at each other. All that optimism has been flipped into nervousness as we work through earnings season. Markets dropped in April (further supporting Kristy’s ‘markets always drop when we go away” theory) but are still doing well for the year (TSX up 4%, S&P up 6%).
Berkshire Hathaway shareholders meeting is taking place this week, and for the first time, Warren Buffet is hosting without his long-time partner, Charlie Munger. Charlie passed away at the age of 99 a few months ago. Buffet and Munger are famous for dispensing advice on investing strategy, finance, and life. Munger had a profound influence on the trajectory of my financial career.
When I first started as a planner, I was 25. I look back in hindsight and wonder why anyone would ever trust a brand-new advisor of 25 with their wealth. Thank you very much to my long-term clients for your confidence! I tried to make up for my youth and inexperience by reading and educating myself as much as possible about markets, investing, and economics. I love to read, but as much as I like investing, I find it a real slog trying to get through what seems like a never-ending supply of market summaries, prospectuses, analyst reports, and economic projections. It is no fun reading a 50-page statutory prospectus from a bond fund detailing how they plan on squeezing out an extra half point in yield, but I was doing it because I thought that was what educating myself as an advisor meant.
I saw an interview with Munger in those early days where he explained that one of the things he did that gave him a competitive advantage was he read voraciously. I can remember audibly groaning when I heard that and recall thinking to myself that there were no shortcuts to mastering financial acumen. But then he went on to say that while he always had a book in his hand, he didn’t restrict himself to business. He believed wisdom comes from learning and expanding one’s knowledge base through a “latticework of interdisciplinary mental models.”
This simple sentence from a financial guru, resonated with me profoundly and created a massive paradigm shift in how I went about my business. I start every day by looking at market headlines, but then I have curated lists of articles that my AI recommends on all sorts of topics that I allow myself to explore. I often read more on psychology, leadership, coaching, sports or motivation than I do on business. I’m not sure if Munger would count them, but I read a book daily through my Blinkist app (book summaries!) that is rarely about business. Not only is it one of my favourite parts of the day, but the most important things I’ve learned about being a successful investor have very little to do with investment strategies.
Discipline, resiliency, mindset, patience, temperament, behaviour, and understanding of delayed gratification will all have a far more significant impact on the likelihood of being a successful investor than stock selection. Thank you, Charlie Munger, rest in peace!
Markets are in uncharted territory in that you have an economy that was too loose with its cash during COVID, the only time in history a working economy was forcibly shutdown, now trying to reign in the inflation that was caused by easy money and demand issue with aggressive rate hikes. Offsetting the contractionary fiscal and monetary policy is the rise in Gen AI. Arguably, one of the biggest influences on productivity since automation is AI, which has rapidly adapted across businesses. Secondary applications are just starting, and who knows what long-term business ramifications will come. It will undoubtedly be a disruptor in industries, but there is no clear winner or killer app yet. No one has found the “Facebook’ of AI yet, but the suspicion is that it is in the works somewhere. Go ahead and find me an easy historical reference you think this reminds you of!
There’s a movement in society today that “lived experience” is somehow more authentic than learned experience. You can read about it in books, but the theory posits that someone who has experienced history directly will provide a better understanding of it.
That sounds like it would be true, but it also has some significant flaws. We just got a new puppy, Kobi, our third family dog. Our first two dogs were energetic but super easy to raise and train. Based on our lived experience with the first couple of dogs, I would tell you that, while there were challenges, raising a puppy was fun. I can tell you now that if Kobi had been our first dog, we would have only had one dog in our family! She is all kinds of cute, wrapped up as a big bundle of trouble! Same animal, same family raising it (and with more experience than the first ones) but a whole different level of tribulation!
Obviously, a balance of learned experience and lived experience is best, right?
There is no historical reference for this particular confluence of market conditions, and in my informal poll of fellow advisors at the conference, despite hundreds of years of collective lived experience, no one had any real sense of where markets are going short term.
We do know that while history doesn’t necessarily repeat, it often rhymes. We do know that we need portfolio discipline to mitigate risk. I consider it your job to create wealth, and my job is to protect it. We want to make sure it grows faster than inflation so that we can turn the investments into an income capable of funding your retirement lifestyle.
I would argue that my part is harder, and while I fully acknowledge the argument is self-serving as it keeps me in a job, hear me out. There are more accidents on the descent from the peak of the Himalayas than on the climb. I believe sustaining wealth is more complicated than creating it – or, at the very least, is on par in difficulty. You can build wealth instantly with a lucky break, a great decision, or over time through consistent investing, but maintaining wealth requires constant vigilance. My job, as I see it, is to protect the wealth from inflation, overspending, longevity risk, market volatility, bad investments, and poor decisions. Did I convince you?…
The good news is that while we don’t know what markets will do next, we don’t need to when we have a definitive blueprint for managing portfolios.
Markets are diverging, and that divergence will create both risk and opportunity. Diversification is critical to managing risk, and buying good companies with durability will see us through the shifting macroeconomics. It’s not a stock market; it’s a market of stocks or businesses.
We still want to let winners run, but maintaining discipline with concentration risk and position size is important. We must adapt and trim the deadwood in portfolios, but in a perfect world, we want to find ideas and companies that work and never sell them.
It’s exciting times with markets, but I have a lot more confidence in corporate balance sheets than I do in the geopolitical climate. I don’t even know how to put a risk metric around the possibility of Iran and Israel going to war, an escalation of Ukraine/Russia, or global election results.
We invest in stocks with at least a 3-year mindset and keep enough powder dry to manage short-term cash needs. That gives our investments in equities the time needed to sustain exogenous shocks and still have time to recover. That doesn’t mean we don’t make mistakes, but it’s a lot easier to evaluate the quality of a business over a longer time window than a short one. That portfolio discipline allows us to keep calm as we read the headlines of the day, albeit with an equal amount of bemusement and horror at the state of the world!
I included a picture of Kobi because puppies are supposed to be good for your mental health and stress relievers. My lived experience with Kobi will tell you to be grateful it’s just a picture!
Stay safe, stay disciplined, stay positive!
Jeremy
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