Investment Principles
Overview — What you can expect:
I believe the optimal approach to investing is to adapt your portfolio in such a way that you aren’t damaged by the investing environment and that you have a reasonable probability of reaching your goals.
The investing environment we face now is characterized by growing complexity and radical uncertainty. It’s tempting in the face of that to throw up your hands and just invest passively in a cookie cutter index and hope you can hold on and not be scared out when the markets collapse. But, first of all, there are a number of thoroughly tested strategies that succeed despite that complexity and uncertainty. Second, there are regularities, repeating cyclical opportunities that can be recognized and acted upon. And last, there are publicly traded companies in identifiable conditions that have very high probabilities of continuing as sound investments. Why not take advantage of these opportunities?
None of this is perfect! There are no guarantees; only greater or lesser probabilities. But those probabilities can represent an edge, a statistical advantage that I can provide.
My outlook is adaptive. My process is adaptive. In periodic discussions, I will give you my best judgment on the economic environment with supporting indicators. I will lay out strategic and tactical alternative postures and specific investments with potential rewards and possible risks. And we will discuss how you can position your portfolio to benefit from the emerging conditions.
Alternatively, we can discuss the overall posture for your portfolio and you can delegate the discretion to me to select specific investments that fit that posture.
Why “strategy” instead of “financial planning”?
In general, strategy is adaptive; financial planning is rigid.
Strategy admits the possibility of error and prepares for corrections; financial planning assumes you know what’s going to happen, or else you’re just unlucky.
Strategy challenges its own assumptions and holds them tentatively; financial planning just assumes it knows the future will be more or less like the past, so you can expect average results.
Strategy expects the future will likely be different from what you imagine now and systematically prepares to adjust depending on what does in fact happen; financial planning just assumes it’ll all work out as planned, so you can just relax and stop paying attention.
So, rather than making a plan, adopt a strategic process and execute that process. Rather than assuming the future will be average, like the past, assume it will all change and that to succeed, you will have to change with it.
What’s “Adaptive”?
Adaptive means to change your behavior to fit the changing circumstances you face. How often do you drive with your eyes closed? You don’t! Driving is one of my favorite investing analogies: you immediately and constantly adjust your speed, direction, and acceleration to the changing scene in front of you and all around you actually, making decisions as fast as you can blink.
Granted, it’s probably a mistake to change your portfolio at that speed – although that is slow compared to some very successful high-speed trading firms. Mostly, the economy at large and the conditions that benefit or handicap specific sectors or industries change at a more leisurely pace. With lots of warnings and advance notice from an almost overwhelming number of indicators.
For any set of conditions, you can design – based on historical precedents of similar conditions – a portfolio of investments that will benefit from those developing conditions. To do this successfully, you can’t just “set it and forget it,” any more than you can drive with your eyes closed! Somebody has to drive, somebody has to be the pilot, somebody has to watch the dashboard of indicators and adjust the portfolio as the conditions change.
That is “adaptive.”
What about “timing the market” vs “buy and hold”?
Interestingly, despite the uncertainty discussed above, there ARE some reasonably predictable regularities — cycles — in economic activity and financial markets — just like there are seasons that influence how farmers and gardeners go about their work. The cycles are obvious on price charts and besides the price fluctuations, there are lots of indicators — from very crude to very sophisticated — that indicate what is happening and what can roughly be expected to happen. These cycles create a powerful edge for those that follow them. The time horizon for the cycles with practical investing relevance can be as short as a season to as long as a business cycle, providing several incredible investing opportunities in an individual’s lifetime.
Buy and hold investors ignore these cycles. In some versions, buy and hold even ignores value indicators for individual companies, recommending just holding large indexes of stocks without any discrimination. In addition, the standard buy and hold recommendations to “hold for the long term” are typically talking about 30-50 year holding periods, on the basis that the majority of periods that long have been profitable. The problem is that this ignores the many periods of that length that have not been profitable, and there is no way to know if the coming future period will be. Buy and hold refuses to pay attention to all the information relevant to investing decisions. “Hope” is not a strategy…