Step 1: Acknowledge the Difficulty in Investing

Investing in the bond, stock and private markets is hard. Full stop. 

It requires thick skin (5% daily swings and 40% annual), self reflection (understand where you are winning/losing to make adjustments), and humility (understand there are many areas you cannot predict).

My philosophy is based on 20 years of institutional stock picking (plus another 10 of non-professional).

  1. Predict for the long term.  Focus on relative valuation, earnings trends and sentiment. 
  2. Embrace Randomness.  New information changes frequently and we don't know what we don't know.
  3. Win With Process. Limit your large bets, have proper risk management tools, rebalance to take advantage of volatility.

 

ALWAYS BE CAUTIOUS OF OVERCONFIDENCE.  Be aware of the friend that always talks about their stock market wins, takes on large bets or claims to know everything.

Step 2: Best In Class Techniques

As established in Step 1, diversification is a critical part of success.  The foundation at Yale has been a thought leader over the past 40 years on proper diversification which has lead to a better return over time.  This model has not been available to investors with less than $500 million until recently   Best in class also involves:

  • Investment committee to determine long term macro and thematic focus
  • Select top managers in asset classes that can generate alpha.
  • In depth due diligence/suitability
  • Risk management analysis (where are the risk relative to the plan)
  • Scenario analysis (what would happen with persistent inflation, market crash…)

This role is becoming more analytical.  It is imperative to have someone with investment experience.

 

Step 3: Win at the Margin 

96% of institutional portfolio managers have under-performed the TSX and S&P 500 Indices over the past decade. The data doesn't exist for longer periods of time but the odds are against retail and institutional investors.  The market is largely efficient - it is quick to react to new information.  To succeed one needs a unique angle or the ability to enact change within a company which requires huge investment teams and lots of fees. PMs also have pressure to beat the market every quarter so are rarely focused on the long term and do not care about the individual investors' tax liabilities. 

My approach:

  • Large Cap = Passive approach.  Keep fees and taxes as low as possible. 
  • Small Cap/Int'l = More active approach. Find top managers and ad-hoc investment opportunities. Be mindful of fees.
  • Private Market = Very active approach.  Focus on the top managers that will drive change within an organization and have cheap access to capital.
  • Structured Notes = Utilize on an ad-hoc basis when volatility in the market is high.