Investors need ‘a healthy dose of stoicism’ in times like these
It’s that time of the year again where we are all getting ready for Christmas, and for us here up north hoping summer eventually comes, putting the RWC behind us, crossing our collective fingers on the CWC, sending tax details to accountants, and wondering how our investments have fared so far for the year. The year of 2023 has been a year of oddities and risks (weren’t 2020, 2021 and 2022 as well?) The New Zealand General Elections are now thankfully behind us (albeit at the time of writing, we’re awaiting the shape of our new Government), we have seen interest rates double (we are not alone), inflation is still with us, petrol for the boat is a sticker shock, and there are seemingly two wars on. The S&P500 is down for the past three months in a row (not seen since 2020, one more month and it’s a 2011 “GREXIT”parallel). That’s a very abridged version.
“If you can keep your head when all about you are losing theirs” are the first 13 words of the poem “If” by Rudyard Kipling (1865–1936). It is a literary example of Victorian-era stoicism, something that investors need a lot of right now! Stoicism is defined as “The endurance of pain or hardship without the display of feelings and without complaint – the development of self-control and fortitude as a means of overcoming destructive emotions.” Apart from a healthy dose of stoicism, at times like this as investment advisers we like to go back to first principles when the environment around us is tough. We try and build portfolios that are durable and buy shares in companies that behave well with each other ie portfolio diversification, we prefer to be style agnostic (not growth, not value), we have a range of companies which behave in different manners during different market conditions, and in many cases are uncorrelated. Shares in companies that you won’t lose sleep owning, confident in the enduring attractiveness of the business model.
How do we look at investments that help us sleep at night and endure bumpy climes? In most cases we have followed and been engaging with company management teams for at least a decade. We have developed channel checks outside of the companies themselves, to understand the businesses, their competitive landscapes, and the opportunities better. We don’t compete at the ‘now’ or the next earnings results, we look years out for what businesses can become. I remember analysing F&P Industries in the early 1990s when its “healthcare” operation was a mere note in the accounts, classified as “other”. Now look at what that little operation has become: F&P Healthcare. Superior capital allocation, return on invested capital, and management execution are key things we look for. For that reason, we tend not to adjust our core portfolio unless the thesis changes (and sometimes it does). This affords us time to understand the bigger picture of what a business can become and lest us stay out of the “noise”.
Fixed Income securities are an important part of our portfolios too, offering a steady income stream, and hopefully additional capital returns when an economic slowdown impacts the listed equity markets. Bond markets have been tough in the past 18 months, as the value of existing bonds have been impacted by rapid Central Bank interest rate increases. On a forward-looking basis though, I think they represent great value. Investors can create robust quality portfolios of NZ corporate debt yielding 6.5%-7.5% at present, potentially with some capital upside if the yield curve shifts down – definitely a good low risk building block.
Meanwhile what are classified as Alternative Investments such as private equity and venture capital can offer excellent returns over time too, notwithstanding they do pose a unique set of challenges. Certain of these investments tend to have limited liquidity, and capital can be tied up for many years. Thus, it is crucial in the selection of alternative investment / funds that there is a strong management team at the helm, with a history of successful capital allocation. We spend a lot of time talking to fund managers in this space and filtering the opportunity set for our clients. At Hobson Wealth we see these assets as a crucial part of long-term wealth generation, and the opportunities presented during stressful economic conditions can create the potential for outsized long-term gains.
The other side of this coin is “Wacky Wednesday”, a Dr Seuss book from the 1970’s with 48 pages of images that get progressively “wackier” namely a picture frame upside down, a palm tree growing in the toilet, an earthworm chasing a bird, a plane flying backwards, a tiger for a chauffeur, and a traffic light showing that stop is green and go is red! As kids you had to spot them. Once a month at Hobson Wealth we hold “Wacky Wednesday” where we run through a series of shares (50 or so) that we just need to try to avoid: not investing in the shares of poor companies is equally as important from a portfolio standpoint as picking the winners. In Australia, over half the stocks in the ASX200 are down so far this year while here in New Zealand its over 60% and quite a chunk of these (many household names) not far off all-time lows.
One of the hardest things to do is cutting losses and moving on, that stock you own that didn’t work out and you say to yourself – it’s come back so much that I can’t sell it here. A well-known and respected funds manager used to tell me: “Warren, you don’t need to make your money back on the stock that has gone down, re-deploy that money in to something that will go up”. And she was right. The question to ask yourself is “If I had another $10,000 of cash sitting in my account would I put it into that same stock – if the answer is no, then you have your answer of what to do with that stock (hint: sell it). If you aren’t always investing in what you think is the very best, then you need to recalibrate your decision-making process. If you have a 10-stock portfolio, then those shares should be the stocks that you believe provide you with the best possible risk adjusted returns against every alternative – within reason of course.
Be quick to cut your losses and ride your winners – remember the math – if you own a stock that falls 50%, it needs to double to get your money back. Believe me, doubles are hard to find.
Lastly, we have our adage from market legend Ken Fisher to fall back on – it’s all about “time in the market”, not “timing the market”!