Quick Fix Syndrome.
If sports fans applied the same principles to investing as they do to their favourite team, their results might be disappointing.
It’s early in the season yet the phone-lines at the sports-radio call-in-shows have already lit up. Like a retail minded investor, upset Vancouver Canucks fans expect their team to win every game. With every win, it’s time to plan the parade route. With every loss, a ‘quick-fix’ trade is demanded. How soon will it be before the callers demand a trade for a big winger, or another puck-moving defenceman or a finishing centre? The Goaltending controversy has already started.
Long suffering, Winnipeg Jets fans will recall the 1985 transaction that sent defenceman Dave Babych to the Hartford Whalers for big winger Ray Neufeld. Needless to say, ‘The Trade’ didn’t make the Jets a winner.
There is no quick fix.
AN answer is seldom THE answer. It’s never about one piece. Rather, it’s always about how the pieces form a team. How many times has Vancouver Canucks GM Mike Gillis said ‘it’s about the process’? Gillis combines scouting, player development, free agency along with superior training, practice, systems for both power play and penalty kill as well as full-strength and, of course, skill and speed and then adds in a comfortable ‘hockey’ environment (the Canucks player ‘facilities’ are indeed elite), with the best nutrition and advanced sleep management science. Coach Alain Vigneault then manages the bench to play to strengths while countering the other coaches’ match-up tactics. That’s process. There is never ‘one’ answer. (If there is, it usually carries with it a lot of risk … a.k.a. all eggs, one basket).
Commitment to process applies in the investing world.
Investing is about planning, strategy and disciplined implementation that, in combination, make the different investment pieces fit together to form a portfolio that can endure through all economic conditions and market environments. Ups and downs. Survive to play (or invest) anther day.
In the past few years, some investment portfolios have received a body check. Some Investors might have an urge to take a quick-fix, piecemeal approach. But there are few saviour products. (Investors need to be particularly vigilant after market corrections because that is when the ‘guaranteed’ products make an appearance). Adding pieces to existing pieces creates a collection of otherwise fine products. Each product might be capable on its own but individual products do not a portfolio make. (Imagine a team of 20 Pavol Demitra’s)! ONLY when the pieces complement each other do they balance a portfolio.
Like a winning hockey team needs offence, defence and goaltending, investments need to perform differently at different times and at different speeds through different environments. When offence isn’t scoring, defence plays the trap. When some investments zig others should zag. Stocks provide offence. Bonds defence. Together they balance a portfolio. With each investment playing its role, the portfolio performs … most of the time. This is the opposite of an all-eggs-in-one-basket approach and is a lower risk strategy that doesn’t depend on a single player … er, investment.
The Detroit Red Wings are like a well-built investment portfolio. Their strategy builds depth of skill through strong organization, good scouting, intelligent drafting and smart player development with enhancement through trading for overlooked talent. The result is an enduring hockey dynasty that has qualified for the Stanley cup finals six times in the last fourteen years. And won four times.
Successful investors build a portfolio that endures by having a simple plan, a well thought out strategy, a balanced allocation to an array of assets, reasonable expectations and a low-cost but diversified implementation.
The process is ongoing not a one-time activity.
Doug Cronk CFA is Manager, Investments for a Canadian Pension Plan