If you can't predict the future, how do you build a robust portfolio?
John Garrett headshot
John Garret
Managing Director
發布 2020 年 8 月 20 日

If 2020 hasn’t yet taught you it’s impossible to forecast where the markets are going, you’ve missed an important lesson. The other big lesson from 2020 so far is to expect the unexpected.

Markets are hard. They’re complex, adaptive and interconnected systems, where everything affects everything else.

If you’d been told at the start of the year we’d have a synchronised global crisis where unemployment rates would hit their highest levels since the Great Depression, the price of gold would surge, international travel would be suspended, oil prices turn negative, and US GDP fall more than 30% annualised in a quarter, you’d be forgiven for thinking stock markets would have followed-suit and tanked. But you’d be wrong. In fact, the S&P 500 is now trading at record highs, as is the high-tech Nasdaq index which is also up over 20% year-to-date.

A futile approach to investing

The events of 2020 have reiterated just how hard it is to forecast markets.

Economies and markets aren’t subject to Newtonian laws. While history can provide a useful guide, the same inputs at different points in time won’t necessarily deliver the same outcome.

This makes investing based on a market view or an economic outlook problematic – while common and popular – often futile. So much about the world is too difficult to predict.

The one key question to a robust portfolio

Our approach to investing is to keep things simple. We view our investments as a share in the underlying business. If the businesses grows our investment grows along with our share in the company.

We believe there are always investment opportunities in the market. The one key question we seek to answer – regardless of conditions – is ‘what are the key drivers that will grow the business?’

There are many things that, in our view, are unlikely to have much of an impact on a business’ long-term growth: Trumps tweets, currency levels, interest rates, GDP growth, and Fed policy amongst other things. However, this is where many investors concentrate their attention.

Of far more importance to us are the specifics of the business; its competitive advantage, its people, culture, extent of innovation, and any tailwinds it may benefit from.

Many of these are qualitative in nature and won’t be found in a spreadsheet or forecast model. Rather, they are the product of knowledge, experience, and active management.

What we know from experience is that businesses with aligned management and strong balance sheets protect portfolios from dilution risk in down markets, diversified industry exposure helps protects against sector specific risk, and owning assets uncorrelated with economic growth can help shield portfolios from recessions. When it comes to economics, we generally assume things muddle through.

While we’ll never be immune to swift market and economic downturns, owning high quality businesses with strong identifiable key growth drivers can help to ensure our portfolios weather the storm, and emerge stronger.


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