The Investment Perspective – June 2022

“Neither the investing method nor the fundamentals of the business are right or wrong because the mood of the market is favourable or unfavourable toward the “stock”. That is because when you really think about it, “stocks” (shares) are all about the financials and the trading price, the share price… the cash up value. What matters more is the economics of the business” 

Peter Flannery

Key Points:

• Is sitting tight useful or just repetitive?
• Why not sell if the market is falling?
• How does the way we invest combat inflation?

Sit tight. Sit tight, sit tight… sit tight…

Recently, two clients made the point that I did not seem to be doing much as their adviser with their portfolios.

One said that he had received one adjustment for the portfolio and some emails over several months but no other action. 

Another pointed to the fees he had paid for the month and still, a recommendation to sit tight. 

Swing you bum!!  This relates to baseball and the idea that some spectators want the batsman to swing at every ball that is pitched. 

One thing is for sure, we’ll all get to judge in hindsight as to whether sitting tight is the right move. 

So far (the recent 6 months or so), sitting tight looks OK.  However, it won’t always be right.

What about rotating? 

Rotating is where fund managers and sharebrokers adjust weightings in a portfolio to take advantage of what they see as opportunity elsewhere with shifting trends. This approach is valid.

The question is whether the costs involved and the decisions made reflect real improvement beyond investing in quality productive assets and allowing the compounding growth of those assets to do the heavy lifting long run? 

In some instances, rotating or shifting funds from one place to another can be an advantage. My experience of it is that it’s not always an advantage.  Investing reliability becomes investing uncertainty.

But what about energy, healthcare, and commodities? 

This is part of the rotation story over the last 6 to 12 months or so. Again, the idea being that we sell out of tech and buy into the aforementioned areas. Of course, we’re seeing commodity prices rise, and so this idea looks good. 

In short though, once the current lift in inflation and the drivers of those trading price spikes slow down or move on, then what happens to those trading prices?

The point here is … 

The bottom line is that we invest in the business rather than the stock. 

This means that we’re less inclined to be moving money about to try and make money. This doesn’t mean it can’t be done. What we know is that it can work, but this approach can also not work and is therefore unreliable. 

Then there are transaction costs

But aren’t transaction costs minimal?

Transaction costs or sharebrokers commissions can range anywhere from 0.3% to 2% (approx.), depending on a number of variables and what’s being traded. It’s one thing to trade a New Zealand stock but quite another to trade a UK Small Cap or other investment in another currency. 

One transaction, doesn’t amount to much cost.

The point though, is that if we subscribe to following constantly changing trends, then that means a higher level of investment churn across the portfolio. Then, it’s not just one transaction but many across the whole portfolio. That means increased ongoing costs to administrate the portfolio. 

For example, one statistic years ago showed that all the dividends paid out on the American share market were actually used up in share brokerage and transaction costs. Admittedly, that’s a bit anecdotal, but it highlights the point that transaction costs, once we start going down that path are not as small as they might seem once we add them all up, across the whole portfolio, over a period of several years. 

Also this excludes the cost timing and judgement errors (adjustments made too early or too late).

So, we just buy and hold then?  

Buy-and-hold does not accurately reflect what we’re doing at WISEplanning but let’s agree that indeed, when we find a good business, we are more likely to stay with it rather than move it on because of a shift in market sentiment or change in the trading price that has little to do with the economics of the underlying business.

Simply, the methodology (the business vs the stock) is important to consider when thinking about levels of activity. 

Portfolio concentration 

Warren Buffet and Charlie Munger worked out decades ago that diversification may help reduce portfolio volatility, but it also slows down investment growth long term. 

The compounding tables we all learned at school clearly show that even a 1% difference in return makes a significant difference in the amount of money that you and I can make (or not make if we are too defensive, incur unnecessary costs). 

Admittedly, we need to invest in quality businesses to make concentration work.  Simple to say, not so easy to do.

“Less is more” when it comes to investing in a number of different investments, especially if you are looking to maximise returns over time. 

Investing in the business (rather than the stock) is not mainstream across the markets, everywhere you look. Indeed, this approach is rare. 

To Summarise

Sitting tight is actually a recommendation. It requires analysis, experience and value judgement.

It is not a ‘non-recommendation’. 

We can always transact. 

“Swing you bum!”

This is the phrase that has been articulated by Warren Buffet about those who want their investment managers to just, do (buy or sell) something. 

In baseball, you can swing at every pitch or not. The reality is that swinging at certain pitches helps to improve the home run rate. 

Investing successfully, on purpose, by design, without regret is the plan. It won’t be perfect.  It might be with less cost and a lot less noise than a number of other options that play the market. 

What do you think though? 

“There are decades where nothing happens; and there are weeks where decades happen.”

Vladimir Lenin