"The best way to measure your investing success is not by whether you're beating the market, but by whether you've put in place a financial plan and a behavioral discipline that are likely to get you where you want to go." -Benjamin Graham
Investing is a marathon, not a sprint. Usually, this comparison is made to highlight the benefit to a long-term investing perspective. This metaphor helpfully reinforces one of the laws of investing: stock prices are unpredictable in the short-term, but in the long-term they ascend with the earnings of the underlying companies. Charles Ellis, founder of Greenwich Associates, has drawn another insightful comparison between investing and marathon running in a recent interview:
Very few runners enter a marathon race trying to win. Instead, most runners enter the race with a personal goal in mind- for some, it’s a personal time they are trying to beat, others may simply be striving to finish the challenging race. As a result, many runners- beyond the one individual that wins- finish the marathon with a deserved sense of joy and accomplishment.
Like running a marathon, the yardstick for investing success is based on your personal goals. Each investor is in a different situation, with a different comfort level for market drawdowns, and working towards a different target. As a result, comparing two different investment portfolios can sometimes be like comparing apples and oranges.
With that in mind, our investing process starts with a written financial plan. Before crafting an investment plan, we need to work with you to develop a picture of what you are trying to accomplish financially; by when and for whom. Next, we will carefully consider your entire balance sheet and review what is currently in place. Then, we can back into an investment strategy that is grounded in your personal goals, comfort with risk, cash flow requirements, and tax considerations. And remember- investing is a marathon, not a sprint.
Quick Hits
On Saturday, February 25th, 92-year-old Warren Buffett released his annual letter to shareholders. As one of the most successful investors of all time, Buffett’s perspectives rightfully drum up plenty of interest. Thankfully, Buffett has been educating investors in his annual letters for over 50 years, covering a wide range of investing topics (One of my favourite books is The Essays of Warren Buffett by Lawrence Cunningham. Cunningham takes portions of Buffett’s shareholder letters throughout the years and organizes them by topic). In these letters, Buffett often provides insights related to security selection, but I think all investors can learn from Buffett’s investing mindset- buy great businesses at good prices and take a patient, long-term approach. Letters can be read in their entirety on the Berkshire Hathaway website, and here are my highlights from the 2022 letter:
Source: Forbes
Prioritizing personal relationships is an important consideration throughout retirement. Some interesting “food for thought” for retirees/soon to be retirees, from a recent article in Barron’s magazine:
The key factor for well-being in retirement is to keep an active social life. Get a hobby if you don't already have one. Volunteer at a charity. Have dinner with friends.
That advice may sound corny, but there are significant benefits to your health. The Harvard Study of Adult Development, which has been tracking a group of adults and their descendants for 85 years and counting, has found that close personal connections are a key factor in longevity as well as physical and mental health.
"The fastest accelerant in symptoms of cognitive decline is isolation and loneliness," says Bank of America's Hutchins. "You have to make sure you can continue to socialize and that your physical and emotional needs can both be met."
When planning for retirement, think about who you'll have lunch with, says Joseph Coughlin, director of the MIT AgeLab. "That gets to not just how good is your investment portfolio, but also how good is your social portfolio? Do you have friends? If you're moving in retirement, will you be able to find them? It takes time to make a good friend," he says.
Resilient consumer spending, the strong labor market, and higher-than-comfortable near-term inflation projections have increased the probability of the US Federal Reserve raising rates another 75 bps to 5.5%. Inflation is going to be the tail that wags the dog over the next little while: if it remains high, rates are likely to rise further. If it continues dropping, central banks can pause their rate hikes. (Higher interest rates risk pushing the economy into a recession). We shall see how things unfold and we remain prepared for a variety of adverse macroeconomic outcomes.
The markets have been very thematic in the short term. Unpredictable sector-level swings lead to “the babies being thrown out with the bathwater”. Sector leadership changes on a dime and then technician traders chase momentum and drive prices further in one direction...some early 2023 examples include US Healthcare and CAD energy. We don’t play this game. We focus on resilient wealth creation by owning high quality businesses over the long term.
An interesting note from our Portfolio Advisory Group re: the lagged effect of interest rate increases: “Most importantly, history has shown that it takes time for higher rates to work through the economy. The Canadian housing market is a good example. Canadians with mortgages make up about 35% of the country’s households (another 37% are renters and 28% don’t have mortgages). Only a fraction of households (2%) have variable rate/variable pay mortgages that would see mortgage payments fluctuate with changes in interest rates. A larger share of households either have variable rate/fixed pay mortgages (10%) or fixed rate mortgages (23%), and neither of these see any change to payments over the term of the mortgage. In other words, the number of Canadian households that have been impacted thus far by higher rates over the past year may not be as large as one would think. The bigger challenge will unfold over the next few years as homeowners who either purchased a home or refinanced their home in the past five years may have to potentially refinance at much higher rates. In other words, it’s upon the refinancing that households will have a potential wake-up call and be forced to reassess and reprioritize their spending and saving. This scenario is not guaranteed to unfold exactly as described, but it’s one we must be prepared for.”
Google is a core holding in many of our accounts, and the stock has recently pulled back in the face of competitive pressures from ChatGPT (an artificial intelligence chatbot), launched late last year by Microsoft-backed OpenAI. Investors fear that integrating ChatGPT into Bing search will eventually lead to Google losing its share in the internet search market. However, Google has its own AI chatbot that they will continue to work on and eventually bring to market. Google is well-equipped for this AI-race given their incumbent advantage, significant free cash flow generation, and sizable current cash balance.
Additional comments from managers of the Canoe Global Equity Fund, as they continue to own Google despite these headwinds: “The ChatGPT launch and Microsoft-OpenAI partnership largely does not impact our long-term outlook for Alphabet. Regarding the news and its potential impact on GOOGL, we believe more AI-driven information discovery / products could be complimentary to Google search and expand the TAM over the long-term. ChatGPT uses deep machine learning to generate dialogue-based, human-like answers, which is different than search which provides quick links. While there have been constant attacks on Google search over the years, the company has a strong track record of defending and growing its search business ($160B+ revenue; 3y growing low-teens). Further, the company has one of the largest in-house AI R&D teams.”
We view the recent stock weakness as overdone and continue to hold Google. However, we will not hesitate to “cut bait” if the situation changes.
Source: The Economist, RBC Wealth Management
Please feel free to reach out if you have any questions. Have a great month.
This information is not investment advice and should be used only in conjunction with a discussion with your RBC Dominion Securities Inc. Investment Advisor. This will ensure that your own circumstances have been considered properly and that action is taken on the latest available information. The strategies and advice in this report are provided for general guidance. Readers should consult their own Investment Advisor when planning to implement a strategy. Interest rates, market conditions, special offers, tax rulings, and other investment factors are subject to change. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ® / TM Trademark(s) of Royal Bank of Canada. Used under license. © 2020 RBC Dominion Securities Inc. All rights reserved