Martin Pelletier: Be safe, but know when to take risks
Tom Cruise plays Captain Pete ‘Maverick’ Mitchell in Top Gun: Maverick. Photo by Scott Garfield I capitulated to the hype last weekend and went to the theatre to watch Top Gun: Maverick and wasn’t disappointed. I really don’t want to be one of those people reading too deeply into what was a simple but fun, no-thinking experience, but upon reflection, there were some notable highlights that I think can provide some lessons in helping you become a Top Gun investor.
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So come along for a ride with me: “Light on. Let’s turn and burn.”
“You told me not to think” There is a time to play it safe and a time to take risks. This is where experience comes into play, especially when in a dog fight with the markets. However, investors tend to look backwards and allow human behavioural aspects to take over, resulting in bad timing decisions with regard to risks.
Article content Investors typically buy at market tops for fear of missing out, and sell at market lows as the paper losses become too much to bear or, worse, start short selling.
For example, the S&P 500 is having its second-worst start to a year ever, losing roughly 20 per cent, and retail investors are both selling down existing positions and shorting the market. The relative bets against stocks earlier this month beat the previous records set in the early days of the 2009 financial crisis and the start of the COVID-19 pandemic, according to Jason Goepfert, chief research officer at Sundial Capital Research Inc.
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Article content The S&P 500 is as oversold as it was at the March 2020 lows when using a 14-week stochastic to measure momentum, according to Jurrien Timmer, director of Global Macro at Fidelity Investments Inc. He also points out that certain areas of the market have been hit harder than others, such as the Russell 2000, which has a P/E multiple now under 10x and below that of its 2020 lows.
“Want Mach 10? Let’s give ’em Mach 10” There is a reason Maverick is only a captain and Iceman is an admiral. Maverick pushed the risk-taking too far. In one scene, Maverick achieves his goal of Mach 10, but decides to push it beyond the limits, destroying the spy jet in the process.
In today’s market, there are many examples of this, with investors going all in on one particular asset class and pushing it to extreme levels, whether it be speculation on Canadian residential real estate, cryptocurrencies or even highly torqued technology stocks that have already crashed or are in the process of doing so.
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Article content “It’s not the plane, it’s the pilot” It’s not the investment products that will save you, but good old-fashioned portfolio management. For example, we used 20-year bonds to help our clients in March 2020 and have since replaced that position with low-duration assets such as energy, allowing us to once again protect clients from 50 per cent to 80 per cent of this market decline.
Meanwhile, the traditional 60/40 portfolio is having one of its worst years ever and fast approaching the 20 per cent drop experienced in 2008.
“The end is inevitable, Maverick. Your kind Is heading to extinction” There were so many touting the end to traditional value segments of the market, including Cathie Wood’s infamous US$12 oil call in 2020. At the same time, her fund was going all in on long-duration tech stocks just as central banks were just starting rate hikes.
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Article content Having a bit of old school in your portfolio at certain times in the market cycle is not always a bad idea, but be careful that it’s in areas that are not easily disrupted, such as oil and gas.
Rate hikes are needed to cool inflation so investors need to adjust to the times Going against the herd means asking questions of your own investing strategy Investors should be more wary of buying into the duration trap, not the value trap “I don’t sail boats, Penny. I land on them” It’s always important for you, and even your portfolio manager, to stick to your knitting and not stray too far from your sandbox. Even the pros get it wrong. For example, Alberta Investment Management Corp. losing $3 billion on its Portable Alpha short-volatility trade back in 2020, or the Caisse de dépôt et placement du Québec’s $400-million investment in Celsius Network LLC, once calling it the “world’s leading crypto lender,” which has since frozen withdrawals.
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Article content At times, we will consider deploying different alternative strategies, including the use of outside managers, but we make sure we can easily understand the strategy and all the risks.
To sum it all up: be safe, but know when to take risks; be smart, but don’t overthink it; and always have a plan, but know when to adapt to the moment.
Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc, operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning.
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