Resources/Weekly Insights

Volume 14, Edition 7 | March 2 - March 8, 2025

Harnessing the Power of the Butterfly

Doug Walters, CFA

Most have heard the concept of the butterfly flapping its wings in Brazil causing a tornado in Texas. Miniscule changes can have big impacts over time. The same is true for investing. Consistently finding small advantages can amount to extra dollars in your portfolio. Of course, the reverse is also true.

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

The butterfly effect is a principle from chaos theory, introduced by meteorologist Edward Lorenz in the 1960s. Lorenz found that minor variations in the starting conditions of a weather model could result in significantly different outcomes. He famously illustrated this concept by suggesting that the flutter of a butterfly’s wings in Brazil might trigger a series of events leading to a tornado in Texas. Investors face a similar concept of amplified impact with one major difference… we have some control over the butterfly. In fact, we are the butterfly.

We talked last week about how evidence-based investing involves a series of small academically backed investment decisions, each designed to tilt the performance scales in our favor. Our portfolio manager, Max Berkovich, likes to refer to having “multiple ways to win.” These wins are sometimes seemingly small. For example, we talk a lot about our use of opportunistic rebalancing. Research shows the difference between our approach and the more common time-based rebalancing is roughly a 0.3% benefit to returns. Just one small flap of the butterfly’s wing!

But compounding takes that small benefit, along with any other small advantages we have managed to harness (such as from factor investing) and multiplies them over time. Growth in a compounding portfolio is not linear it accelerates over time. Let’s illustrate this effect with an overly simplified example:

Imagine, at the age of 35 you are gifted $1.0m. Sweet!
Now let’s also imagine you can magically earn exactly 7% on those million dollars per year.
Without depositing any additional money, by the time you retire at age 65, you would have $7.6m.
Now let’s say you were able to consistently earn an extra 1% per year. That “small” increase would result in a retirement balance $2.5m higher.
Boost that increase to 2% and the ending balance is $5.7m higher!

When it comes to investing, the little things clearly matter!

Of course, it works both ways. Any mistakes are also amplified over time. The most common of these mistakes is market timing. Investors, perhaps nervous about what they perceive coming, retreat to cash or reduce their portfolio risk. They might get lucky, but the odds are not on their side. Not only do they have to exit at the right time (outsmarting the millions of market participants), but they also have to re-enter at the right time. Good luck!

Markets have been turbulent in the past few weeks. These are moments where investors traditionally make mistakes. We recommend steering clear of the scare stories in the news and stay focused on the long-term. For us, that means getting as many butterflies as we can flapping their wings in the right direction… attempting to tilt the scales in our favor with multiple ways to win. It’s that simple.

4.1%

Unemployment rate

The latest unemployment rate of 4.1% was slightly higher than last month and expectations of 4.0%.

Headline of the Week

If it’s the first Friday…

Then it’s the jobs report. The economy added 151,000 jobs in February. The unemployment rate ticked higher to 4.1%. It is still too early to see meaningful impacts from changes to the Federal workforce, although some hints were in the numbers. Overall, a solid report with lots of room for different perspectives. While the headline number missed expectations, it was above January and the number still paints a fairly healthy employment picture. That said, the full impact of potential government layoffs, the effect of diminished immigration, and the ramifications of uncertainty around tariffs remain in the pipeline. Coming months could challenge the health of this picture. The report was widely viewed as a non-event for monetary policy with the Fed likely to hold rates steady at their next meeting.

The Week Ahead

Not a lot on the docket for the week with an Inflation report on Wednesday as the biggest market moving headline to watch. Earnings from Oracle Corp. and a rate decision in Canada are the other major occurrences next week.

Too hot to handle!

Lost in tariff tug of wars is the inflation direction. Wednesday, when the Consumer Price Index is released, all eyes will turn to inflation at least for a moment.

Inflation for February is expected to rise by 0.3% for the month, both headline and core, which excludes food and energy.
Year-over- year prices are expected to have moved higher by 2.9%.
Business surveys have been hinting at corporate America’s preemptive price hikes a head of tariffs on imports, but it might be too early to see in the February numbers.
Modest declines from January may support future rate cuts.
The big fear for markets is inflation, moving in the wrong direction would add kindling to the stagflation conversation as fear of slower growth in the economy is already making the rounds.

Star-struck

As the earnings season comes to an end, other than some retailers, Oracle is the biggest name next week.

Oracle, the database software giant got to ride the artificial Intelligence (AI) momentum to a 60% run up in the stock in 2024, but like other AI cohorts has tumbled in the new year, so earnings release may help get it back on track.
Since the Chairman, Larry Ellison appeared at the White House to announce Oracle’s involvement in Stargate with OpenAI and SoftBank, market expects more details during the earnings call.

Reading the maple leaves

Canada’s central bank is expected to cut rates this week, after slashing rates by 2% so far.

A sluggish economy and mostly subdued inflation paved the way for previous cuts, however, this time it might be in response to tariffs.
With uncertainty on tariffs, both magnitude and timing Bank of Canda will look to loosen policy proactively.
The Bank’s Governor Macklen stated, “the economic consequences of a protracted trade conflict would be severe.”
Approximately 76% of Canada’s exports go to the U.S.

Spring into action

On Sunday do not forget to adjust the clocks for daylight savings.

Spring forward an hour, so we lose one.

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