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The tortoise and the hare

hare and tortoise

6 Jul 2023

Home > News > The tortoise and the hare
Slow and steady or highly dynamic – is one investment style better than the other?

At a very high level, there are two styles of investing. The first is to focus on asset allocation, or what we call a foundation portfolio. The second is to try to identify short-term market opportunities or anomalies. The first is slow and steady. The second, highly dynamic. But is one better than the other?

Our contention is while the foundation portfolio is slow and steady, much like a tortoise, it is more likely to get an investor to the destination for two reasons.

First, because it is slow and steady, it is less likely to make you panic and sell your holdings even during periods of sharp market sell-offs. Indeed, if you are truly diversified and you have a multi-year time horizon, any sell-off should be treated as asset markets going on sale and, therefore, seen as an opportunity to increase your investments in your foundation allocation.

Second, a more opportunistic approach assumes you have an ability to time markets or pick which stocks are likely to outperform, which even market professionals – presumably with more time, skill, and resources than the average investor – find incredibly difficult.

Let’s take this year as an example for market timing. In our 2023 Outlook, we argued this year would be much better than 2022. Of course, this was against a low base of comparison. When considering the performance of US equities and US government bonds alone, 2022 was narrowly surpassed as the ‘worst year for investors’ over the past 150 years, second only to 1931 when US stocks experienced a decline of 47%. While stocks ‘only’ fell 19% in 2022, this decline was accompanied by the worst sell-off for bonds in the same 150-year period. As a result, a balanced allocation performed extremely poorly.

At the end of last year, when we presented the above analysis and forecasted that things would improve, we encountered investors whose wounds were still too fresh to confidently increase their investments. However, looking back now, an investment in our growth portfolio would have generated over 7% in the first 6 months of 2023, much better than our expectations.

This shows the challenge investors face. It is very difficult to disassociate ourselves from the pain caused by the recent poor performance of our portfolio when considering its potential outlook. Therefore, when markets are weak, recency bias often leads us to default to the question, ‘Should we sell our investments?’ However, a student of history knows that the question we should be asking ourselves is, ‘Is this the right time to take advantage of markets going on sale and accelerate our investments?’

That takes care of market timing. What about our stock picking abilities? Let’s start with the challenge. Less than 27% of US S&P500 index constituents have outperformed the overall index so far this year. This means the odds of you picking an outperforming stock, assuming you throw darts at a board to select stocks, is roughly 1 in 4.

So, the starting odds are stacked against you. If you want to overturn these odds, you should ask yourself, ‘what is your edge over the thousands of professional equity fund managers who are trying to achieve the same goals?’. If we were to ask Warren Buffett this same question, I suspect his answer would involve patience and discipline – both when it comes to entry price and giving markets adequate time to reflect a company’s true value. These qualities would likely be at the top of his list. Additionally, I would add his analytical capabilities, the time he allocates to investments, and the skillset he has acquired over the past 80 years.

Staying power is an undervalued trait. Personally, my staying power increases with the level of portfolio diversification. But let’s take the example of the best performing stock so far this year. Today, with the rise of AI, it might seem obvious that Nvidia would do very well. However, it was not so obvious at the end of 2022. Indeed, it fell 43% between August and October and then fell 26% in a 2-week period in December. Would you have had the confidence to hold through those brutal corrections? Professional investors don’t always get it right, of course. For instance, Softbank invested USD 4bn into Nvidia in 2017 and subsequently sold its stake in 2019. Since then, the stock has increased 10-fold.

The final thing an investor should consider is the amount of time you are willing to commit to analysing financial markets and what you want to achieve from investing. If you have a genuine interest in financial markets and seek to explore intriguing opportunities, then there is nothing wrong with taking a blended approach. However, it is important to note that the opportunistic bucket is unlikely to be the best performing option. As the saying goes, people pay for their hobbies, not the other way around. At the end of the day, a tortoise has a plan, sticks to it, and gets the job done. The hare does what comes to his mind at any given point on the journey, has some fun along the way, but does not necessarily win the race.

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