By Miles Clyne
To us, portfolio management is like looking at a bunch of puzzle pieces and sorting them out in a way that will give us the greatest possibility of success. To put it another way, a great portfolio has far more favourable risk/reward potential. This simply means that it has much higher likelihood for returns than losses over a reasonable time frame. There is no exact science to this, but I can assure you that just getting this more right takes you a long way towards getting what you’d hope to achieve from investing.
At the Tycuda Group, we certainly have our own opinion on how to get this more preferable risk/return outcome. We have built our own software and use multiple other sources to gather what we believe to be the most relevant information. Then we use our software to pull these pieces together in a way that gives us more of what we are looking for: a more favourable risk/return profile for our portfolios.
This unique approach to investing is complex, but in a nutshell it looks at everyday data and makes sense out of what is happening in the markets. It isn’t a crystal ball, it is more like a GPS. Unlike traditional portfolio management that keeps you on the same path, regardless of economic issues, we will move off a path because the risk/reward ratio for what we are trying to achieve has been altered to where it is no longer in our favour. This isn’t a fickle process. We assess the longer-term situation in the markets, and when necessary, reduce risk by selling the securities that have the greatest challenges given current market conditions.
Both risk and return are very real. A quick look at our Canadian market: the S&P/TSX Composite has experienced two bear markets since 2006, which lost about 50 and 22% respectively, two bull markets and approximately 14 corrections greater than 5% over this period. The net result is that the S&P/TSX Composite gained approximately 17.4% over this time period. This time period was almost a decade long, meaning the average return was marginally over 1.75% annually. This is not a good risk/return relationship. This does not bode well for the majority of investors given the majority of investment managers underperform this market index, often by a very wide margin.
The reality is that the markets do not care about you.
A large percentage of investment strategies replicate the markets and keep you fully invested at all times. Traditional portfolio management is the easy route, and it was sold to me in my early years in the investment industry. At Tycuda, what we have come to know is that it is neither the safe nor the most productive road to travel for investors. Finding our own guidance system was necessary.
Curiosity keeps us learning and getting us closer to what matters the most. Don’t let frustration beat you down as an investor. Stay curious. In a two part blog we published in September of 2015 we explained what we think are the two most important questions you need to ask an investment professional. These two questions will reveal which professionals who are also curious enough to not simply accept what they are told.