Winning The Investment Game

Dec 13, 2018 | Alan MacDonald


But if short-term results are not always in your favour – how do you judge whether you have the right portfolio? There must be some type of criteria that can be used outside of whatever happened in the market yesterday.

The recent markets are certainly telling us that, in the short term, things don’t always go our way. But most experienced investors have come to accept that markets are random in the short term; they go up and they go down. When markets zig instead of zag is anybody’s guess.

We’re quite confident we have clients invested in a manner consistent with their objectives and we don’t really worry about the day-to-day market changes. In the long run, we know that risk and return are related and getting a decent return means you have to take some volatility.

But if short-term results are not always in your favour – how do you judge whether you have the right portfolio? There must be some type of criteria that can be used outside of whatever happened in the market yesterday.

A place that deals with randomness every day is the casino. Yet casino owners consistently have great results in spite of regularly seeing short-term outcomes that are not in their favour. Unlike the players around the table, you certainly would never see a casino owner sweating over the next spin of a roulette wheel.

So what’s the difference between the owner and the players? Why is the owner confident that they have nothing to fear from lady luck? The answer is, of course, that the owner has stacked the odds in their favour. They know that because they have a zero slot on the roulette wheel that eventually, given enough spins, they will walk away with bags of money.

Anywhere you look in a casino, you will find a system at work. The system can’t control anything in the short term – but it can, given enough events, yield an almost perfectly predictable longer-term outcome.

Casino owners know that focusing on the results from the next spin or card hand is a dead end. Instead, they create systems that will inevitably put them on top.

Investors can do the same. They can avoid taking their cues from day-to-day market outcomes and instead focus on the things that will yield a reliable result with time.

A few examples of such systems would be things like re-balancing to an investment policy statement or holding a reliable portfolio for the long haul. Stocks go up 75% of the time and decline 25% of the time. With an edge like that it makes staying put a way more reliable strategy than jumping about hoping to guess when the next blip is going to happen.

A rebalance to an investment policy statement means that an investor will regularly trim back highly appreciated positions to add to positions that may not have done as well. This is a fairly reliable way to sell high and buy low without paying attention to the incessant noise of market commentators.

It’s worth noting that a system will rarely yield the best possible result. Going back to our casino players, it’s unlikely that an owner can match the result of a big bet on a random spin that happens to work out in a player’s favour. But no owner would expect such a thing, they would know that those extraordinary results are the exception and are rarely repeatable.

Some investors will have extraordinary results by making a big bet on a sector or a stock, but unless they have a big box of money somewhere else, the risks in doing so outweigh the potential return. For every extraordinary result you hear about – there are a number of others who bet big and then silently lick their wounds.

At Livingston MacDonald Wealth Management of RBC Dominion Securities, we believe that focusing on the system and not on the random is the way to help ensure your reliable results. We start with a plan, then create a portfolio that has the highest chance of meeting the plan’s objectives. We focus on the things we can control: rebalancing to an investment policy, being sufficiently diversified, holding through difficult markets, making sure planned savings get saved and reviewing it all on an annual basis.

Gambling belongs in the casino, not in a portfolio. The Watermark system can keep it that way.


This article is supplied by Alan MacDonald, an Investment Advisor with RBC Dominion Securities Inc. Member–Canadian Investor Protection Fund.