Pilots will tell you that it is nice to have a headwind when taking off or landing but most of the time a tailwind is preferred. A headwind provides more lift for an aircraft’s wings but the greater air resistance slows the plane while cruising and increases fuel consumption. A tailwind produces the opposite effect. Reduced air resistance allows the aircraft to travel at a greater speed with lower fuel consumption.
It is not uncommon to hear references in the financial press to economic headwinds and tail winds as well. Economic headwinds include the sorts of things that make it difficult for a business to thrive. These would be things like stagnant economic growth, high tax and interest rates, and high inflation. Similarly, we can be said to enjoy economic tailwinds during periods of strong economic growth, low unemployment, low tax and interest rates, and low inflation.
The investment world has its own set of headwinds and tailwinds and we have been fortunate to have been riding some pretty strong tailwinds recently. Since the North American stock markets bottomed out in March 2009, they have been rising pretty strongly and steadily – the proverbial rising tide that lifts all boats. Although the precipitous drop in oil prices interrupted that rise on our side of the border, it has been good news for most other sectors of the economy and the broader stock market.
Partly as a result of the oil price drop, we have also seen a substantial weakening of the Canadian dollar, as measured in US dollars. This is a tailwind for Canadian holders of US stocks and other assets denominated in US dollars. For example, the S&P 500 index of US stocks rose just under 1% in the first quarter of 2015 but when measured in Canadian dollars it rose by over 10%.
There is a school of investment thought that suggests that anticipating these headwinds and tailwinds and positioning one’s portfolio to take advantage of them will enhance investment returns. That’s true if one anticipates correctly and acts in a timely fashion. Unfortunately, that is very difficult, if not impossible to do on a consistent basis.
It is not uncommon to hear references in the financial press to economic headwinds and tail winds as well. Economic headwinds include the sorts of things that make it difficult for a business to thrive. These would be things like stagnant economic growth, high tax and interest rates, and high inflation. Similarly, we can be said to enjoy economic tailwinds during periods of strong economic growth, low unemployment, low tax and interest rates, and low inflation.
The investment world has its own set of headwinds and tailwinds and we have been fortunate to have been riding some pretty strong tailwinds recently. Since the North American stock markets bottomed out in March 2009, they have been rising pretty strongly and steadily – the proverbial rising tide that lifts all boats. Although the precipitous drop in oil prices interrupted that rise on our side of the border, it has been good news for most other sectors of the economy and the broader stock market.
Partly as a result of the oil price drop, we have also seen a substantial weakening of the Canadian dollar, as measured in US dollars. This is a tailwind for Canadian holders of US stocks and other assets denominated in US dollars. For example, the S&P 500 index of US stocks rose just under 1% in the first quarter of 2015 but when measured in Canadian dollars it rose by over 10%.
There is a school of investment thought that suggests that anticipating these headwinds and tailwinds and positioning one’s portfolio to take advantage of them will enhance investment returns. That’s true if one anticipates correctly and acts in a timely fashion. Unfortunately, that is very difficult, if not impossible to do on a consistent basis.
To reach one’s travel destination, we think it makes more sense to focus on the airworthiness of the aircraft and the skill of its pilot rather than the way the wind happens to be blowing. The likelihood of achieving investment objectives is enhanced by owning good quality businesses together with sufficient cash to support one’s lifestyle through the rough patches. The management teams of the companies we own are in the best position to adapt their business plans to the changing economic circumstances particular to their businesses. There is little to be gained from our guessing when the economic wind direction may change. We are happy to ride the investment tailwinds when they are available and accept the headwinds when they come, confident that the businesses we own will withstand any market turbulence and get us safely to our destination. Both in air travel and in personal finance, it’s best to think more about the vehicle that will bring you where you want to go and less about the headwinds and tailwinds along the way.