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Seaweed and the savvy sailor

Seaweed and the savvy sailor

Why watch the tides go in and out without giving up our strategies

March 2018 has almost ended and it looks like it will be another red month. Client portfolios will be affected. The title of this article is dedicated to one particular client who frustratingly refers to the way his portfolio drifts up and down as “seaweed”. His frustration is real and his concern valid. You are right I say. The term we professionally use for seaweed movement is volatility. Sometimes the tide is strong and the moves are high and sometimes the tide is low and the moves are shallow. My agreement with the client does not help his concern. However, "there is no such thing as absolute positive returns" I say, so let's evaluate our alternatives. Straight line, low risk or risk free, absolute returns for investments are a myth, a marketing term used to lead investors into believing that they should invest in whatever the salesman is offering. "Ok", says the investor. "If returns over time are low and potential for losses seems so high, why should we bother", he asks? "Let me just put my money in cash and forget about it". Then conversation goes back to financial planning basics.

When we invest for clients in public markets we take risk on their behalf knowing full well that the portfolio can go down in the short term. We are not trying to achieve double digit returns - we are trying to achieve modest mid-single digit returns and the compounding effect of time does its magic. The difference between 4% and 1% over 20 years is a whopping 80%. $100 invested at 1% annually for 20 years will return $122 whereas $100 invested at 4% annually for 20 years will return $219. This is what it’s all about. It's not about achieving 10% returns each year as that is impossible given the risk attitude most people have toward their wealth.

Our process has a few fundamental assumptions. Each time the market sells off 2% to 3% the first concern in my head is not the reason for the sell-off but if the long term assumption is affected. These long term assumptions are in fact as solid as anyone of us can expect. They will outlive Trump and his tweets and whatever policy chaos he creates.

Some of the readers here must have heard my colleague, Shmuel Ben Arie, give his excellent TED type talk about why the stock market is not like a casino (in Hebrew). Many investors feel that the stock market is a casino and “the house” – i.e. some corrupt rich guy who has rigged the system – will always win. Shmuel’s conclusion is fact. The difference between the casino and the stock market is simple – it’s time. The longer you are in a casino the worse your chances are of exiting with a profit, while the longer you are invested in the stock market the greater your chances of a profit. The best chance you have in a casino is a single spin on a Roulette wheel, betting on either black or red. That's about a 49% chance of a 100% return on your investment (or a 51% chance of a total loss of your “investment”). Every spin thereafter the chances of winning are reduced and the chances of the house winning are increased. After 20 years in a casino you are pretty much guaranteed to be totally bust (if not much sooner). Whereas the short term results of a stock market gain are not as simple to measure the 20 year statistics are almost perfectly in your favor. This is why we do not panic when markets are red. We knew they could go red at any time (without reference to why). One never knows the reason. Rising rates, Trump tweets, Chinese fears, European break ups and so on. The reasons are too many to list and if one were to fear each of these or the totality of these risks then clearly you cannot invest.

Looking back over the last twenty years, there was no shortage of worries including the near cataclysmic 2008. However investors who started in 1998, had they stuck to their strategies, would have achieved their long term goals almost as if there had never been any problems along the way.

As to the matter at hand, Trump’s trade war - this was a known risk. Trump’s campaign promises included tearing up trade agreements. We knew it, and companies who trade internationally knew it. It will take time to adjust - certain companies will be negatively affected and certain countries will be positively affected. It does not fundamentally change our investing assumptions at all. It's just one more ripple in the pond to move the seaweed.

That is why we are like seasoned sailors, who watch the tides go in and out without giving up our strategies. We live with the seaweed because we know the ocean is on a long term path to rise up.

 The aforementioned information is not a substitute for personal Investment marketing, which takes into account the particular circumstances and special needs of each person. The views expressed in this article should be considered as market comment for the short term for information purposes only. As such the views herein may be subject to frequent change, are indicative only and no reliance should be placed thereon. This article does not constitute legal, tax or accounting advice, or any investment recommendation, or any offer to buy or sell financial instruments of any kind, and does not take into account the investment objectives or needs of specific investors. Although this article has been produced with all reasonable care, based on sources believed to be reliable, reflecting opinions at the time of its writing and subject to change at any time without prior notice, neither Pioneer Wealth Management nor any other entity or segment within the Pioneer International Group makes any representations or warranties as to the accuracy or completeness hereof and accepts no liability for any loss or damage which may arise from its use. The writer and the company are unaware of any conflict of interest at the time of publishing the above commentary.

About the Author

Mike Ellis

Mike Ellis

Director and Chief Investment Officer

Mike Ellis, originally from South Africa, joined Pioneer in March 2000 after working in the Private Banking & Trust industry in the UK. At Pioneer he was the group CFO for the better part of the last decade. Today Mike serves as a director and is the CIO.

Mike is a Chartered Accountant, a CFA charter holder and received his MBA from Tel Aviv University & Kellogg Business School. Mike is also an Oxford University Alumni having participated in the Said Business School's Global Investment Risk Management Program. In addition, Mike is a licensed Portfolio manager by the Israel Securities Authority.

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