This article was originally published on RealMoney.com on August 21st at 8:00am EDT
This is something clients love to hear: When I tell you that “hope is not part of an investment strategy,” I’m saying I’ve got a bulletproof plan. A plan immune to external forces and exogenous events. This is the plan nobody else has. Everybody else is probably just hoping their investment philosophy works out, nervously biting their nails and praying for a favorable outcome.
Is the most sophisticated “smart money” institutional platform not hoping the market responds to their strategy in a way that is most beneficial to them? Are the largest market participants not hoping that historical norms and data sets are something on which they can confidently rely? Is Warren Buffett not hoping, to some extent, that his portfolio holdings continue to perform — that no major changes occur in their business trends? Does he know with certainty that International Business Machines (IBM) is going to return to growing shareholder value? No. He doesn’t know that for sure because no one does. He hopes so, though, and he hopes so with conviction.
He is Warren Buffett, not Biff from Back to the Future II. And Berkshire Hathaway(BRK.A, BRK.B) stock is down 8% year to date. I can’t guarantee what happens in tomorrow’s market, but I guarantee Buffett is not worried about being down 8% year to date.
I mean, what is the alternative? Assuming that it won’t work out? Hoping it doesn’t?
If I insist on leaving hope out of the equation, then I am left owning a laddered portfolio of CDs, T-bills and Treasury bonds. Anyone who says hope should not be a part of a successful investment strategy is trying to convince themselves or their clients (or both) that they have figured out the way to get access to riskless reward. To me, this is irresponsible and dishonest.
My guess is that, at some point, all parties will end up being disappointed.
“I don’t throw darts at a board. I bet on sure things.” – Gordon Gekko
As an example of what I’m suggesting, let’s look at the market’s most undisputed bellwether for the last decade – Apple (AAPL). The presumption these days is that Apple stock is a sure thing. The company has a ton of cash (over $200 billion as of last quarter) and seemingly “everyone” wants Apple products. Never mind that the iWatch has been a flop thus far, the iPhone and iPad still have hundreds of millions of prospective customers in emerging markets, they say. And that could be true. But is it really a sure thing to own AAPL stock today? I think shareholders have got to be hopeful about several things — most notably Chinese economic growth and an easing or reversing of the strength in the U.S. dollar.
My point is that hope is, in fact, part of an investment strategy. It’s a big part. To advertise that “hope is not a part of my investment strategy” is to pretend I know more than I do. It is to knowingly misrepresent oneself.
What gets in the way of hope a lot, especially these days, is the noisy daily news flow and fear factory that is our nation’s media machine. It’s no secret that scary headlines get more clicks — I’ve read some estimates that negative headlines get clicked at least five times as much as those more benign.
Think of the scary headlines from the past few years: U.S. credit downgrade; European debt debacle (Parts I, II, III, IV…); Greek default; oil’s implosion, etc. Some of these certainly caused short-term hiccups for the markets and investors. But volatility (short-term oscillations) is different than risk (possibility of permanent loss of capital).
Now think of the scary headlines today: China’s slowing GDP and currency devaluation; energy and high-yield distress; and the prospect of global deflation.
If you’re bullish, you are hoping the scary headlines will be proven untrue; if you are bearish, you are hoping the scary headlines are true; and if you cannot handle the idea of allowing hope into the equation, you should be invested in cash or be so hedged that you have a very limited upside.
Along with a well-thought-out investment philosophy, defined entry and exit points, and a willingness to adapt to changing conditions, hope is most certainly part of the equation.
Have a great weekend.
Adam B. Scott
Argyle Capital Partners, LLC
10100 Santa Monica Blvd, #300
Los Angeles, CA 90067
(310) 772-2201 – Main
Adam Scott’s profile on RealMoney can be found here.