One of the difficulties of being a Financial Wealth Manager is the expectation from most of the investors is the expectation that the accuracy of future market predictions has to be as close to 100% as possible to be able to make a successful return. For traditional passive portfolios, this is never a discussion because it is often not part of the strategy. But for those of us that go beyond traditional strategies to reduce the risk for our clients (see Nov. blog on why), it is often preparing for possible negative impacts to a portfolio that may not appear for a time or not at all. This often means that predictions are a lot less accurate than 100%.
It took me quite a number of years to come to terms with this scenario as it did not satisfy my ego. But what I discovered over the years from my mentors and the top hedgefund/traders was that strategies that reduce downside portfolio value risk often meet investors financial goals better than looking for strategies with 100% accuracy. And what investors are usually looking for often leads them to mediocre returns and sometimes charlatans.
With that being said, to look back at the past is to pay attention to the possible risks of the future and how it affects our financial portfolios. Below is an excerpt from a newsletter that comes from one of the fund companies we currently use, LongBoard Asset Management, that I think you will find timely. You will notice the first date in parenthesis is comparing to the second date. Why I think this is important (even if point #6 never materializes) is because human nature always looks for an easy way out of painful situations and thus often leads to repeating the same mistakes. Looking for similar situations will greatly increase your awareness of potential negative surprises and allow the consideration within your investment strategy.
Time and places change but human nature seems to be a constant.
“I believe Ray Dalio, Founder and Co-Chief Investment Officer of Bridgewater Associates, LP, the world’s largest hedge fund, has best articulated the most likely current market cycle. The main points of his thesis are summed up in the 1937 Analog:
1. Debt Limits Reached at Bubble Top, Causing the Economy and Markets to Peak (1929 & 2007)
2. Interest Rates Hit Zero amid Depression (1932 & 2008)
3. Money Printing Starts, Kicking off a Beautiful Deleveraging (1933 & 2009)
4. The Stock Market and “Risky Assets” Rally (1933-1936 & 2009-2017)
5. The Economy Improves during a Cyclical Recovery (1933-1936 & 2009-2017)
6. The Central Bank Tightens a Bit, Resulting in a Self-Reinforcing Downturn (1937)
In 1937 the combination of monetary and fiscal tightening pressures created a significant selloff in risk assets, Dalio wrote. “Stocks fell the most, but home prices arrested their gains and dipped negative as well.” Stocks fell more than -50% from March 1937 to March 1938!
You can read Bridgewater’s full thesis here: Part 1 Part 2
We are now seeing markets that may be flashing the beginning of the self-reinforcing downturn outlined in bullet point 6 of Mr. Dalio’s thesis.”
A very interesting perspective of the past and the present situation we find ourselves in and considering Bridgewater published this in 2015. If you do any further research on Ray Dalio you will find that he says “It isn't easy for me to be confident that my opinions are right. In the markets, you can do a huge amount of work and still be wrong. Ray Dalio”
Very compelling for a guy who made the list of the top 100 richest individuals in the world. I dare to say that you will probably also find the same thinking from Warren Buffett and the top minds of the investment world. Now, how much confidence can you put in the guy interviewed on CNBC that preaches how he's been 100% right all the time? Early in my career, I had a mentor tell me "Do you want to be right or make money?"
So I challenge you to the same question, "Do you want to be right or make money?"
Your comments and thoughts are welcome…
John Hamel is the Managing Member of Austec Wealth Management, LLC. helping current & retired business owners optimize relative to their company value and personal life.