At the beginning of 2020 I wrote in this space that every long-term investor who has stuck to a plan and ignored the noise of current events and market ups-and-downs has been rewarded with spectacular growth in wealth. Despite the dual traumas of the pandemic and dysfunctional American politics, this fact remains true a year later. Against all odds, balanced portfolios under my management generated positive returns of around 15% in 2020. Some of those returns can be attributed to good research and opportunistic trading. Most decisive, however, has been our resolve not to waver under adversity from our plan. Diversified portfolios that hold high grade common stock at their core always create wealth in the long run. This would be equally true today if our results in 2020 had been negative 15%. You have all heard me say that it simply does not pay to try to time the sequence of market returns. Let the legacy of our investment experience in 2020 be to settle this matter once and for all.
The basic reality that equity ownership is the foundation of any portfolio built to succeed over time remains unchanged. Also unchanged is the price of that success, the intestinal fortitude to tolerate temporary declines in market value along the way to ultimate enrichment. But something of great historical importance is changing before our eyes. You can see it in the behavior of governments (including Canada’s) that are willing to spend money without concern for the resulting deficits. You may have already heard talk of “modern monetary theory,” a theory that holds that governments can spend without worrying about tax revenues and deficits until it causes high inflation. This new and untested theory has been music to the ears of politicians across the political spectrum since it empowers them to spend money without the usual restraints. I believe that the Canada Emergency Recovery Benefit (CERB) would be impossible without trust in “modern monetary theory.” The future will tell whether this theory and the resulting government spending policies are viable or sustainable. Skeptics regard the new policies as little more than money-printing. My response is to place greater weight on the risk of inflation than I would under normal conditions. Equities will outperform bonds in an inflationary environment. I have also added negotiable securities that represent physical gold and silver bullion (held in custody by the Royal Canadian Mint). Bullion diversifies our portfolios without reducing our positive return expectation and protects against inflation and against financial stress that could be caused by currency debasement.
Let me be clear that I am not forecasting high inflation in 2021. When new risks materialize, my response is to adjust the investment mix to try to offset those risks. I build and modify client portfolios with the ongoing goal to build an all-terrain investment vehicle that can carry us through the months and years ahead.
Mark Lloyd, Ph.D.
Vice President & Portfolio Manager