Resources/Weekly Insights

Volume 14, Edition 6 | February 23 - March 1, 2025

Avoiding the Trappings of a Genius

Doug Walters, CFA

When the market is rising everyone feels they are an investing genius. When it falls, true investment skill is revealed. Evidence-based investing is a good way to avoid the pitfalls of genius.

Contributed by Doug Walters, David Lemire, Max Berkovich, Matthew Johnson

In a bull market, everyone thinks they are an investing genius. In a speculative bubble, everyone knows they are. When the bottom falls out, which it occasionally does, true investing prowess is uncovered. I should know. I used to be one of those geniuses.

As luck would have it, the first time I found myself with excess cash to invest, was as a young engineer in the late 1990s. Like many, I quickly found out how easy it was to make money investing. Anywhere you walked, stock tips were flying. JDS Uniphase, Infospace, 3Com… these companies couldn’t lose… until they did, and it was not pretty. Geniuses found themselves feeling less than clever.

Fast forward to today, I am grateful for those early lessons. Long before I had meaningful money to lose, I had already been taught about the dangers of speculation, concentration risk, bubbles, and behavioral pitfalls. These lessons, along with the combined education and life experiences of my colleagues here at Strategic, have guided us to adopt evidence-based investing.

Understanding Evidence-Based Investing

What exactly do we mean by evidence-based investing? In short, it is about making decisions based on data and empirical evidence rather than gut feelings, trends, or hearsay. Investment markets are going to do what they will, and in the long-term they have provided attractive returns. Evidence-based investing is not about predicting those future returns but instead trying to systematically advantage a portfolio to get the most out of the available returns. It is a series of information-based decisions, each designed to slightly tip the balance of performance in your favor, such as:

Focusing on the long-term
Diversifying the portfolio to reduce risk for a given return.
Biasing equity holdings toward proven, persistent factors like High Quality, Good Value, Strong Momentum, and Small Size.
Opportunistically rebalancing to systematically sell high and buy low.
Using tax efficient securities and perform regular tax-loss harvesting.
Avoiding common behavioral biases that can lead to rash decision and market timing.

The Speculative Alternative

How does an evidence-based approach compare to the alternative and often used speculative fortune telling we see from investors? That looks more like:

Timing the market.
Chasing the latest trends and shiny objects.
Guessing the swings in investor sentiment.
Making forecasts about things that can’t be forecasted.
Believing you can outsmart the millions of investors that comprise the market.
Acting on emotion rather than the facts.

An Obvious Choice

Would you rather attempt to systematically tip the performance scales in your favor or gamble with your hard-earned investments and savings? For us, the choice is obvious.

Are geniuses about to be taught another tough lesson by the market? One of our most sacred axioms is that we don’t predict, we prepare. Only time can answer questions about the future. Our job is to be ready for whatever the market throws our way. So far this year, that preparation, in the form of diversification, is paying off. International and Emerging stocks, US and International bonds and Gold are all outperforming US stocks.

2.6%

Core PCE Deflator (Inflation)

The Fed’s preferred inflation figure came in as expected and down from last month’s print of 2.9%.

Headline of the Week

Progress Over Perfection

Despite its title as The Fed’s preferred inflation figure, the core Personal Consumption Expenditures (PCE) often fails to garner extensive coverage when published. This lack of attention is largely attributed to Wall Street’s ability to infer it from other previously released reports. Thus, it is not surprising that that the headline and core number came in as expected. Inflation moved ever so slightly closer to Fed targets, but not enough to alter their wait and see mindset. With this inflation report “below the scroll,” attention remains focused on the latest tariff musings and Oval Office Ukraine drama.

The Week Ahead

A lot going on in the world next week. Israeli-Hamas ceasefire ends on Saturday, tariffs on Mexico, Canda and China are set to take effect and the President is supposed to address a joint session of Congress. Kind-of like a State of the Union address, but not. Those are just geopolitical events. The markets also have a jobs report, a rate decision from Europe and a Chinese economic policy setting meeting to digest.

Jab on Jobs

The non-farm Payroll on the first Friday of the new month is expected to show an increase of 133,000 jobs in February.

The pace of job creation is slowing, as the January report was 143,000 and below expectations.
With the Department of Government Efficiency (DOGE) moving quickly to slash spending, government headcount will surely be in focus.
Reuters news agency has estimated that tens of thousands of government workers have been reduced, so a true number would be nice to see.
If the number comes close to the estimate it will be the lowest total of new jobs since October.

Making the Cut

The European Central Bank (ECB) will decide if it has time to wait or cut rates on Thursday.

There is significant uncertainty in the markets on direction, so possibly an inflation report early in the week will shed some light.
Markets expect about three cuts this year, with a very small margin indicating that next week will be one of those cuts.
The U.S. Dollar to Euro exchange rate has fallen below the $1.04 level, getting closer to parity.

Two Sessions Meeting

This is the gathering of the Chinese National People’s Congress to set out economic goals or targets.

Expectations are that China will stick to its 5% Gross Domestic Product growth target.
Economic targets, budget details and policy goals will be revealed during the session.

Also, commentary should be provided about the deflationary pressure within the world’s second largest economy.

About Strategic

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