Balancing our Beliefs

By Miles Clyne

Too many ignore or forget the lessons of history. A benefit of my work is I get front-row access to great investors and their insights. What I find fascinating is that although most will have similar opinions on the issues facing us at any given time, many will have wildly different approaches regarding how to deal with them.

The following is a true example of one professional’s actions, which is likely similar to many regular investors’ actions during the same period. Roughly 13 years ago in 2009, the professional investor believed that three of the major Canadian banks were going to go bankrupt in the coming months. He sold all these investments. For perspective, this was on the heels of US banks like Lehman Brothers, AIG & Bear Stearns effectively going bankrupt just months earlier. Plus, the unemployment rate was rising, and stock prices were sinking. These were dire times in late 2008 and early 2009 and most investors were forecasting much of the same for 2009 mainly based on emotion.

In hindsight we know that the Canadian banks handled the great recession extremely well and that type of pessimism was unwarranted. This provided a major lesson because investor sentiment got too negative and stock valuations got too cheap. It became quite apparent that during drawdowns it’s human nature to do the wrong thing at the wrong time. For a little insight into my own thought process, I see investments as though they are on a pendulum, always swinging too far and occasionally become excessively expensive or a bargain.?

We have choices, in the example where a professional investor sold most of his bank holdings by being overly pessimistic or alternatively you could be overly optimistic. Both options are driven by fear and greed. Neither typically works out in the long term because you must consistently be more right with either choice.

We need to be able to weather storms as they are always coming our way. Market corrections occur on average about every five years. ?Rather than being all in or out, we take the approach of increasing our hedging/insurance in times of greater risk. We also focus more on value and trying our best to take the Gretzky approach in ultimately being positioned for where the puck is going to be, meaning we need to look at the big picture. ?As an example, the world needs fewer carbon emissions so what are some primary solutions to this problem, then owning securities that can potentially profit with the changing economy.

We won’t commit aggressively to any one belief other than having good options for various economic cycles. We need to have tools to temper our fear and greed like anyone else. The approach of ‘we would rather be approximately right vs. absolutely wrong’ is a necessity for survival for all of us.? This time the issues that are causing the chaos may be different, but our behaviour should not be. Here is a great link to a recent article by Craig Basinger who I respect. His article speaks to the current state of affairs and how outcomes could vary from positive to negative. Effective solutions typically need to be broad-based because of the variety of potential outcomes. ?

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