Tom Bradley is co-founder of Steadyhand Investment Management, a member of the Investment Hall of Fame and a champion of timeless investment principles.
I gave in. I couldn’t stand it any longer. Everyone was doing it. No, I didn’t buy Nvidia NVDA-Q. I started doing Wordle. And if it doesn’t take too long (ugh), I also play Connections.
For this column, I’m going to skip Wordle and ask you to play Connections with me. The investment version. For those who’ve never played, the rules are simple. You have 16 words – which appear in the accompanying chart – and the task is to find the four groups of words that belong together.
Note: If you’re hard core, skip the next paragraph where I provide the categories in advance.
For those new to the game, the categories are: boring basics; lots of attention, little impact; too hard; and important but overlooked. Before I give you the answer, stop reading and see if you can find the four words in the chart that belong in each category.
Boring basics. A plan isn’t the most exciting aspect of investing, but it’s important. Without a road map, you can’t expect to get to your destination. Part of any plan is an asset mix that fits best with your goals, time frame and capacity for volatility. It’s the biggest dial you have on your investment dashboard for balancing risk and return. Speaking of risk, it’s the fuel that generates a return in excess of the risk-free rate. It works as long as you give it time. Get-rich-quick schemes are tempting but dubious. Time in the market with an appropriate asset mix is how wealth is built.
Lots of attention, little impact. Economists are media darlings based on the assumption that the direction and pace of the economy dictates where stock markets are going. Wrong. In the short term, the two are totally unrelated. Meanwhile, the business media (and economists) hang on every word from the U.S. Federal Reserve even though Fed moves are only important for a few moments of every cycle. Banter about a quarter-point rate cut is just noise. Elections can be one of the most emotional topics for investors and one of the least consequential to portfolios. Okay, maybe not the least consequential – that would be watching the ticker tape (or the daily value of your portfolio), which is totally random and risks taking you off your long game.
Too hard. And perhaps too dangerous. Warren Buffett has a “too hard” pile on his desk which is full of companies that are difficult to understand. The rest of us are well advised to follow his lead and stay within our circle of competence. Some things are even too hard for the pros, or aren’t even possible to understand. Market timing goes in the pile. It would be hugely valuable if it could be done, but it can’t. At least, not consistently enough to be useful. If you think getting out at the right time is hard, try getting back in. You can win big if you add leverage to your portfolio but investing on margin only works if you can stick with it, especially when stocks are down and you’re underwater on your loan. Options are in the same category. They too can juice returns, and in the hands of professionals are useful for managing exposures and risks, but buying naked options, well, leaves you naked. Index-linked notes are the banks’ most despicable product. The pitch: you get to participate in the stock market with no chance of losing money. The reality: after they strip out the dividends and create a Byzantine formula for how you participate, the bank is the only one ensured of making money.
Important but overlooked. Valuation is the most important factor on the road to success and yet it’s often overlooked by investors and commentators. The price you pay for anything determines whether it’s a bargain or not. Investing is no different. Sentiment, or the mood of investors, has an impact on how attractive valuations are, and is a valuable tool for measuring risk. When everyone is bullish, it’s time to get cautious, and vice versa. China is a huge part of the world economy and will shape how the next decade plays out. And closer to home, too many Canadians don’t know how much of their return is going to their adviser or portfolio manager. Make sure you’re getting value for the fees you’re paying. Investing shouldn’t be part of the sharing economy.
How did you do?