If you want to invest like the Patriots, you need the right gameplan

Reprinted courtesy of the National Post
by Tom Bradley

I admit it. I’m a New England Patriots fan. This admission may seem trivial, but I live on the West Coast where the Seahawks are worshiped.

I take the reputational risk because of how the team is managed and coached. Yes, five Super Bowls feeds my fandom, but I like the fact that the team is in the hunt every year despite never having a high draft choice and rarely paying up for free agents. The Patriots draft like a value investor and coach Bill Belichick is the master of making the best of what he’s got.

Investment managers also need to play to their strengths. Their game plan is to buy mis-priced stocks based on their fundamental outlook (future profits) and/or valuation (price-to-earnings ratio). That sounds easy enough but renowned industry thinker Charlie Ellis reminds us, “the worldwide increase in the number of highly trained professionals, all working intensely to achieve any competitive advantage, has been phenomenal.” In other words, there’s lots of smart people trying to do the same thing.

But like the Patriots, portfolio managers do have edges they can exploit. I’ll use the current market landscape to illustrate three — flexibility, time frame and valuation.

 

Indexing

Managers’ toughest competitors are index funds. They never want to meet an indexer in the first round of the playoffs. But for managers who are truly active (not just hugging the index) and have a longer time horizon, the trend toward indexing is an opportunity.

I say that because most indexes are valuation insensitive. Their makeup is proportional to the size of companies, not their P/E ratios. As a result, it’s often the case that companies and sectors are most expensive when they’re at their biggest weighting. Gold and energy were important components of the S&P/TSX Composite Index when they were flying high, as were stocks like Nortel and Valeant.

And yet, valuation is the most reliable predictor of future returns which is why active managers should celebrate the growth of index funds. The more money that’s valuation-insensitive the better.

Financial-tainment

Watching CNBC on a day when markets are soaring or plummeting is better than an episode of Bodyguard. It’s electric. Big price moves. Commentators jumping out of their skin. It’s easy to get sucked into the drama.

But these types of shows shouldn’t be confused with long-term investing. They’re focused on the news of the day. There’s no discussion about diversification or portfolio construction, and little said about valuation.

A successful London manager told me recently that he makes most of his money in the U.S. companies that are media darlings. That’s because these stocks bounce around with the news cycle even though the companies’ fundamentals are quite stable.

Our instant gratification world is a gift for investors who have a good sense of valuation and are willing to be contrarian.

Geo-political dislocations

I’m not much for macro-based investment strategies. Not only do they require an accurate economic call, but it’s also necessary to predict how stock prices will react if the call proves correct. Both are hard to do.

There are economic and political events, however, that have already occurred and result in unusual stock movements. I’m referring to structural dislocations caused by pension, insurance and banking legislation, fiscal and banking crises, commodity booms and busts, and of course, trade policy.

Today, the world is full of dislocations. The uncertainty around Brexit has put a pall over U.K. stocks. The Asian markets have been crushed by trade tensions and rising U.S. interest rates. And in Canada, transportation issues have hit the oil and gas producers.

Geo-political disruptions can permanently impair a security’s value, but in most cases companies adjust to the new set of rules and the speculation is worse than the reality. Investors who can look further out and buy with clouds overhead are often rewarded.

The gameplan

Asset managers can’t contend for the Super Bowl every year like the Patriots do. Bad years are necessary to set up the good. But the odds of success go up when they care about the price paid, ignore the indexes and, importantly, develop a client base that allows them to take a longer view than the experts on TV.

Meet Lisa

by Tom Bradley

I'm pleased to introduce the newest member of our team, Lisa Guo. Lisa is joining us in the role of Associate Investor Specialist in our Vancouver office, where she’ll work closely with our client service team in helping our investors build and manage their portfolios.

Lisa was born and raised in Edmonton. She graduated from the University of Alberta in 2016 with a Bachelor of Commerce degree. Lisa has a passion for financial literacy (which scored her big bonus points in the interview process!) and was part of the founding team of a financial education program for university students during her time at U of A. While at university, she also had the opportunity to study in Japan for a term, and worked part time at TD Bank. Lisa is currently pursuing the CFA designation and has passed Level II of the program.

After working as a summer student at RBC PH&N’s Edmonton office in 2016, Lisa joined the firm on a full-time basis in 2017 as a Private Client Associate. She decided to move to the west coast in October 2018 and joined Steadyhand the following month.

As we do with every new employee, we put Lisa on the hot seat with our ‘short snappers’ to get to know her a little better. One thing I learned, aside from her love of ice cream, is that she’s quick on her feet.

• Favourite app: Instagram
  
• Yoga, hiking, cycling, running or none of the above: None of the above ... pilates
  
• Strategic Asset Mix (SAM): 80/20
  
• Drake or Childish Gambino: Drake, but it’s a close call
  
• Favourite Vancouver hangout: ALL THE ICE CREAM SHOPS!
  
• Last book read: Why We Sleep (Matthew Walker)
  
• Show you’re currently binge-watching on Netflix: The Good Place
  
• Guilty pleasure: Ice cream
  
• What you miss most about Edmonton: Family
  
• The world needs more: Environmental awareness

Lisa brings a sharp mind and youthful exuberance to the team. We’re pumped to have her on board.