Patience is a Virtue

The year 2016 has brought a few surprises, and overwhelmingly, a call for change in many parts of the world. Markets are expected to remain volatile as the days, weeks and years to come reveal a new world order. As we look ahead to see what the future holds, there is one thing we know that won’t change and that is our approach to investing and managing wealth.

Our approach to managing individual portfolios has always been to:

  • Build an appropriate portfolio structure of growth and liquidity so that you have the cash you need when you need it.
  • Acquire shares of good businesses so that the success of the business rather than the day-to-day fluctuations of the public markets will define your return.
  • Patiently acquire the shares at attractive prices to produce a better return while reducing risk.

This approach has served us well during our ten years of existence, but for the past few years the hunt for worthy companies has been more difficult. Good quality businesses that we would like to own have simply been too pricey. It appears that after Brexit and the U.S. election results, the markets seem to be holding steady with prices of many company shares continuing to exceed our estimate of their economic value.

Why have shares been so expensive? When the primary alternative is a fixed income security offering a zero or even negative interest rate, many investors are prepared to pay high prices for shares of companies and accept only a modest potential return on the basis that it is better than nothing. There are risks associated with even high quality businesses however, and those risks haven’t changed. Paying a high price just increases the risk of potential loss. The result is investing for a lower return at higher risk and that is exactly the opposite of what we are here to do..

So, what do we do when we can’t find opportunities that meet our investing criteria?

To answer that question, we must revisit what we are hired to do.
Remember that we are responsible for managing an investment portfolio for clients, not just picking stocks. Although deploying capital in accordance with the above tenets is our primary focus, we view our mandate as even more fundamental than that. We think our main job is to do something intelligent with our clients’ money. That means that in the absence of attractive opportunities offering a good potential return at an acceptable risk, we do the next best thing which is to acquire securities that offer only a low return at no risk (e.g., treasury bills).

Of course, we also continue to monitor existing holdings to ensure they maintain their quality and value attributes. That means that we will occasionally trim or add to existing holdings when warranted.

We are comfortable with holding a relatively concentrated portfolio but are also mindful that a well-managed portfolio requires an adequate degree of diversification. This means that a higher percentage of cash and treasury bills may be held in a portfolio in the short term, earning next to nothing. The best way to think of that cash is as a placeholder for opportunities that have not yet arisen. When those opportunities do arise, we will be glad to have a supply of cash available to take advantage of them.

So, what do we do when there’s nothing to do? We remain patient.

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