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Strategic Insights

Volume 13, Edition 4 | February 12 - February 16, 2024

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Being Right for the Right Reasons


In investing it is not enough to be right. You need to be right for the right reasons. Being right for the wrong reasons, or even worse, wrong for the wrong reasons, suggests your strategy needs a rethink.

Contributed by Doug Walters , David Lemire , Max Berkovich , Eh Ka Paw

This week, we had the opportunity to speak to a large group of not-for-profit CFOs about our firm and investment philosophy. We discussed how our relationships with institutions run far deeper than investment management. As partners, we embrace their mission and do what we can to help educate their board on good fiduciary oversight. One topic discussed was investment oversight, which is also a valuable lesson for individual investors.

Our primary message was that good investment oversight requires clearly understanding your advisor’s investment philosophy. Without that clarity, proper evaluation is not possible.

At Strategic, we practice evidence-based investing. I hope all our clients have a good understanding of what that means by now. We base decisions on academic research and historical precedent. We act on what we know today, not what we think will happen in the future. “Science, not speculation” is one of our favorite phrases.

Right for the Right Reasons?

When evaluating performance, knowing your advisor’s philosophy will allow you to classify the results into one of four buckets:

  • Right for the Right Reasons: Their philosophy was in favor; they stuck to it and outperformed (enjoy these moments!).
  • Right for the Wrong Reasons: They deviated from the philosophy and outperformed (a possible red flag – this is likely a combination of speculation and luck).
  • Wrong for the Right Reasons: Their philosophy was out of favor; they stuck to it and underperformed (not a problem – no philosophy consistently outperforms).
  • Wrong for the Wrong Reasons: they deviated from their philosophy and underperformed (a clear red flag – time to consider a new manager).

The point is that good is not always good, and bad is not always bad. You need to dig in and understand the source of the good and bad performance. If it is a function of your philosophy, then that should be okay.

Impatient investors risk falling prey to action bias when their advisor is “Wrong for the Right Reasons.” Action bias is a natural human tendency to take action even when it may not benefit them. Let’s say your advisor practices Value investing, which works well in the long term but can go through long bouts of underperformance. If you leave your Value manager when times are bad, you might be switching out of Value just as it is about to take off and changing into a Growth strategy just as it is peaking.

Whether you are an institution or an individual investor, day trading your investment philosophy is never a good idea. It invariably leads to unsuccessful return chasing. A better approach is to find a philosophy that fills you with confidence and stick with it through the inevitable market ups and downs.


CPI Inflation

Inflation fell to 3.1%, which was down from last much, but not down as much as expected.

Headline of the Week

Technically Speaking

Both the United Kingdom and Japan released Gross Domestic Product (GDP) for the final quarter of 2023, and they were both contractions. Technically, this means both economies are in a recession, defined as two consecutive quarters of contractions. Despite Japan’s economy receiving a downgrade to the 4th largest economy (Germany jumped up one spot), markets shrugged it off. Instead, they focused on how the zero-interest rate policy will have further shelf life.

What moved markets was the Consumer Price Index. Inflation, while on the right track, came in stronger than expected, yet again shifting interest rate cuts further into the year. Instead of celebrating the soft landing the Federal Reserve seems to have orchestrated, a “no landing” was bantered about.

“No landing” is a scenario where the United States continues to squeak out economic growth while digesting above-normal inflation.

The Week Ahead

The holiday-shortened week brings only a few things to get excited about, but some earnings reports, central bank meeting minutes, and a rate decision in China could become noteworthy.

Let’s Take a Minute or Two

Minutes of the Federal Reserve’s (Fed) and European Central Bank’s (ECB) last meeting are out next week.

  • With both central banks on hold, all the rage was hints for when the cuts may start.
  • ECB President Lagarde keeps insisting it is too soon. Experts doubt anything in the minutes will indicate otherwise.
  • While Chairman Powell used all the right words to indicate rates have peaked, he did not offer anything useful on when the cuts might start. The minutes are likely to be just as non-committal.
  • Chairman Powell took March off the table, and economic news, particularly inflation data, has taken May down as well, so the focus now shifts to the June or July meetings.
  • There are seven rate-setting meetings left for the Fed this year.

Dragon Fire

The People’s Bank of China will have rate decisions early next week.

  • After the New Year holiday week, investors would want the central bank to light a fire in the markets with some stimulus, but no action is the base case.
  • March is probably a more likely time.
  • Incidentally, anecdotal evidence indicates strong spending during the festival, which may help the Chinese markets.

Big Deal

Earnings season is a bit long in the tooth, but a few noteworthy companies are reporting next week, none bigger than the AI chip darling Nvidia (NVDA).

  • Nvidia has shot up in market capitalization to now be the 3rd biggest holding in the S&P 500 index.
  • Nvidia’s earnings are highly anticipated and, based on sentiment measures, expected to be very good, but with the stock up 50% just since the start of the year, it needs to be stellar.
  • Very likely to be lost in the shuffle, but Wal-Mart (WMT) and Berkshire Hathaway (BRKA, BRKB) are also releasing results next week.
  • Warren Buffett’s Berkshire has already revealed its investments with the 13F filing, and the increase in energy companies sticks out as worthy of further commentary.

Long Weekend

Observance of the holiday on Monday will have the markets closed.

  • Happy President’s Day!

About Strategic

Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets of over $2 billion.