Lessons from 2016

As 2016 draws to a close, we look forward to an exciting 2017

As this eventful year draws to a close, I thought I would write a few words about what we have seen the last couple of years and what we see going forward… We believe optimism will be a theme in 2017 as economic data, earnings and sentiment have all inflected positively and are poised to improve through at least the first half of next year. We will concede that certain areas of the market, particularly financials, may have run a little ahead of the fundamentals and areas like interest-sensitives and golds may have over-corrected. Equities look to be the asset class of choice for next year and should be well-supported by earnings, multiple expansion and inflows for the first time in a while.

This is also a good time to reflect on our portfolios and how they have performed the last couple of years.

In 2015, all our portfolios were positive when the TSX was down 11%.

In 2016, so far we have had mostly positive returns, but have lagged overall investment markets. Early in the year, the markets plunged and our indicators suggested moving a portion of the portfolio to cash to protect capital, which we did. Central banks stepped in shortly afterward to prop up the markets and we missed the sharp short-term rebound. Our portfolios have done well in the second half of the year, but not enough to make up for what we missed early-year.

If all we wanted to do was match the index, we could just use index funds. But matching the index means mirroring both the gains and losses. The challenge lies in finding a repeatable process that we believe will outperform the index when markets are going up, while protecting the portfolio as much as possible in years that act more like 1929, 1987 or 2008.

Though we didn’t get the returns we were looking for this year, much was learned. Some important pieces fell into place for our investment philosophy and the rules that we added to our process will help enormously in the years to come.

Related to this, I read a very interesting article on the Mawer Investment Management website. The whole article echoed very much what I have been feeling the last year.

Here is a small portion of the article:

“Mistakes happen. They happen every day, all the time, in investing and in life. They are a normal function of learning and a natural part of being human. And yet, for all the discussion these days of embracing failure, there still seems to be a stigma around errors. This is particularly true in investing, where there is an astonishing need to always appear “right” despite the fact that investing is a very complicated domain involving a great deal of uncertainty and in which perspectives must constantly shift.

“Investing is simply not an arena in which perfect decision-making is possible. And that’s fine, because it doesn’t need to be. So long as your investment philosophy is a resilient one — meaning that it puts the odds in your favour over time — perfection isn’t required.

“Mistakes are not something to disregard — they are meant to educate: we’ve been able to make the most out of them because we have a culture of trust, allowing us to feel comfortable reflecting on and sharing our insights. Mistakes, if learned from, can have a cumulative value over time — and save you thousands (or, in the case of our collective clients, millions).”

We do have a strong investment philosophy. We are open and honest about what we are trying to do and why. We believe our strategy will provide a superior outcome for all our clients in the years to come. We learn from what is working – and what isn’t – and we adapt. We know we will face bumps along the way, but each year our process gets stronger. The next few years look like they will be very exciting!

For the full article please see: The million dollar lesson

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