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Volume 12, Edition 31 | November 6 - November 10, 2023

Patience: The Foundation of Investing Success

Doug Walters, CFA
This week we continue our series, taking a deep dive into our guiding principles. Our focus this week is Patience, where we make the connection between the US’s early exit from the Women’s World Cup and investing success.

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

Last week, we introduced our evidence-based investing Guiding Principles. The first is patience. In finance, where markets fluctuate and headlines drive emotional reactions, this principle is the foundation of an evidence-based investing philosophy. This week, we explore the profound impact of a long-term view in avoiding common investing pitfalls.

Action bias is a well-studied behavioral finance topic and explains why patience is so important. I’ll get into why in a minute. But first, an intro to action bias. As humans, we are wired for action. This presumably served us well in evolution. “Hmmm… look at that large animal charging at me… I think I’ll stand here and see what happens,” said no human ever. Taking no action in times of stress is not something our species is good at, even when it is the right action.

Watching the US Women’s World Cup this summer, I was reminded all too painfully of an excellent study that looks at this phenomenon1. The study shows how a goalie’s best course of action in penalty kicks is to stand their ground in the middle of the goal. Yet they invariably dive because diving and missing feels much better than standing still and getting scored on (how embarrassing!). The US team exited the tournament early on penalty kicks and could have taken some cues from this study. They missed three of their last four penalty kicks. The Swedish goalie dove every time. The goalie even dove the wrong way twice as the US missed the goal. What about the one that went in? The US goalkeeper, Alyssa Naeher, drilled it right down the middle. I guess it takes a goalie to know a goalie.

So, how does action bias manifest itself in investing? In times of stress, like market downturns, investors feel they need to do something… anything. In the extreme, we see investors exiting equities altogether only to miss the inevitable rally completely. In the less extreme, we see investors chasing what is working, only to watch their old holding outperform their new ones. What is needed in both cases is patience.

But patience doesn’t mean doing nothing. Instead, it means being disciplined to stick to your philosophy and let your strategy properly play out over time.

What is the cost of impatience? This is a complex number to nail down, but I have personally witnessed investors decimate their long-term performance in one moment of poorly-timed weakness. Vanguard estimates the number to be 1-2% of performance2. That is a massive number that, over a lifetime, can be the difference between meeting your goals and falling dismally short. As advisors, we like to discuss the benefits of compounding returns over time… but mistakes also compound and will only grow in lost opportunity over time.

This won’t be the last time we discuss behavior biases in our Guiding Principles. However, we pull out patience and place it at the top of the list because it is not just a virtue; it’s the foundation of a well-disciplined investment process. Action bias may tempt us, much like a goalkeeper facing penalty kicks, but as investors, our strength lies in standing firm when the situation demands. This simple lesson can be the difference between investing success and failure.

1. Bar-Eli, Keidar-Levin and Shein, “Action Bias Among Elite Soccer Goalkeepers: The Case of Penalty Kicks,” Journal of Psychology Volume 28, Issue 5 (October 2007): 606-621
2. Kinniry et al, “Putting a value on your value: Quantifying Vanguard Advisor’s Alpha®

The potential impact of impatience on your portfolio performance

It has been estimated2 that behavioral biases can cost investors upwards of 2% on the performance, which can be the difference between long-term success and failure.

Headline of the Week

To Hike or Not to Hike

No, we are not asking what Josh Allen thinks as he stares down a linebacker blitz. Instead, it is what Fed Chair Jerome Powell is constantly forced to think about as he stares down a blitz from investors, hoping that he will take a time out or maybe even punt on any further rate hikes.

Last week’s Fed meeting helped push stock and bond prices higher as comments seemed to indicate that the Fed could be done. Last week’s rally could be a precursor to a more sustained rally if markets believe rate hikes are done. Many traders could then try to “jump the snap,” anticipate rate cuts, and make a big play.

However, a decent case can be made that Powell is an experienced economic quarterback who keeps his eyes focused on making progress downfield (lowering inflation). Ideally, he is aiming for the endzone (low inflation and low unemployment), but he at least wants to get into field goal range (2% inflation). Thus, he stepped up to the microphone this week and called an audible. It was a reminder that the Fed remains data dependent, and while rates are generally restrictive, the Fed would not hesitate to raise rates should inflation break from its downward trend.

Some investors may have jumped offside after last week’s meeting, and the resulting scramble back onside has seen the market rally pause. And once again, we will have to wait and see what the quarterback wants to do.

Sorry, that’s a lot of gridiron references…

The Week Ahead

It was a mostly uneventful week last week. Still, this upcoming week is full of economic data, European & Japanese Gross Domestic Product, and inflation reports at home will be the hot ticket.

Slow Your Roll

The preliminary Gross Domestic Product (GDP) from the European Union and Japan will lack the sizzle ours had.

  • The European Union’s flash reading had prepared us for a 0.1% decline in the quarter and a 0.1% expansion from a year ago.
  • Europe faces strong headwinds from high inflation, high-interest rates, and a tightening fiscal policy.
  • While France and Spain are expected to have zone-leading expansions, they are relatively small and insufficient to overcome the anticipated contraction in Germany and Italy.
  • Japan is expected to print a contraction in the 3rd quarter – the first in the past four quarters.
  • The projections for the world’s 3rd biggest economy are a decline of 0.6% after a quarterly expansion of 4.8% in the 2nd.
  • Economists expect Japanese weakness to be driven by a tightening monetary policy and a noticeable slowdown in exports to China.

The Pathfinder

While The PCE inflation measure is weighted heavier by the central bank, this week’s Consumer Price Index release will try to light the pathway of the interest rate curve.

  • Early forecasts anticipate a tiny decline in headline and core inflation readings.
  • As of September, the core, excluding the volatile food and energy, has cooled to a 2-year low, though still north of 4%.
  • The Purchasing Managers Index indicates that businesses are passing on labor costs.
  • The path to 2% inflation faces many obstructions, such as low unemployment and low savings rates, which propped up consumer spending.
  • Had the Federal Reserve not hiked rates (as aggressively as they had), the dollar might have weakened and pushed import prices higher, taking a big bite out of the consumer’s pocket.
  • Speaking of the consumer… Retail Sales report this week is expected to show a mild slowdown in spending.

On the Sidelines

President Biden is expected to meet with his Chinese counterpart Xi Jinping mid-week on the sidelines of the APEC summit in San Francisco.

  • This is the first meeting between the two leaders in a year.
  • To stabilize relations with China, the President is expected to focus on military communications, Artificial Intelligence, and Fentanyl.
  • The US has asked China to pass messages to Iran to avoid an escalation of war in the Middle East, and experts expect President Biden to push that agenda further.
  • Taiwan may come up as well.
  • This will be the first time Xi has stepped foot on US soil since the 2017 trip to Mar-a-Lago.

A Debt of Gratitude!

Saturday is Veterans Day, and we thank the Veterans for serving this country and their many sacrifices.

  • “The soldier above all others prays for peace, for it is the soldier who must suffer and bear the deepest wounds and scars of war.” — General Douglas MacArthur.

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