From the Cavaliers’ stunning comeback in the NBA Finals, to the surprise BREXIT referendum in which Great Britain voted to leave the European Union, to the Presidential election which most pollsters got wrong, 2016 has been the year of the unexpected. While the Cavs victory was sweet indeed, not many people sweated the outcome in the context of their investment portfolios. The BREXIT vote and The Presidential election, on the other hand, were closely watched with trillions of dollars in global investment portfolios hanging in the balance. As the surprise BREXIT and Presidential votes unfolded, in both cases, markets sold off initially. The replumbing of trade agreements throughout Europe would be a long and arduous task for a region that could ill afford even the slightest economic set back, or so investors reasoned. For a few days, they voted with their feet before markets recovered and then some. Donald Trump’s trade rhetoric on the campaign trail and lack of political experience were thought to send U.S. markets down by 7-10% in the event of an unexpected victory. When the Presidential unexpected did happen, the selloff was even more short-lived than BREXIT, lasting a matter of hours before recovering and advancing for the better part of the past few weeks. Whether the power of social media in the modern, connected society has rendered traditional geopolitical analysis obsolete, one thing appears more certain, we now live in a world where not only are the outcomes of events highly unpredictable, but the market’s reaction to them is equally unpredictable. Against this backdrop, what is an investor to do? Our advice is to do what successful investors have always done, diversify, invest in quality and focus on the long term.
In terms of diversification, great wealth is often accumulated through concentration in a closely held asset (eg. family business or workplace company stock) but it is preserved through diversified investing. As an example, Bill Gates has diversified his fortune with only roughly $11 billion of his $83 billion net worth currently held in Microsoft stock. The rest is managed through a diversified investment entity called Cascade Investment LLC. With access to the best market and political intelligence, even Mr. Gates chooses not to have all of his eggs in one basket or asset class. Those of us with less of a margin of safety could learn from this approach.
In terms of quality, we refer to this as the sleep at night factor. Are the individual securities held and the funds owned in your portfolio of an enduring nature? This is the key and it frequently is measured by various ratios but sometimes comes down to the sniff test that we all must pass when evaluating the quality of what we own and the decisions we make in life. It is frequently the difference between suffering temporary vs. permanent losses within a portfolio and having the confidence to endure the former during times of market volatility.
Lastly, the notion of time in the market as opposed to timing the market is critical for successful long-term investing. This mentality is especially true when not only are the outcomes of major events unpredictable but the market’s subsequent reaction is unpredictable too. Provided investments are diversified and of a quality nature, time is the great equalizer when investing. Those who can shift their thinking to a long-term focus are generally rewarded, while those who cannot are left with a far more emotional experience and typically lesser results.
In closing, 2016 has been the year of the unexpected outcome and subsequent equally surprising market reaction. The virtues of diversification, quality and maintaining a long-term focus have been reinforced by both the BREXIT vote and the Presidential election. We continue to believe that against this backdrop, positive investment results and happier outcomes will accrue to those who focus on all three while eliminating much of the rest of investing’s noise.
John Micklitsch, CFA, CAIA, is the Chief Investment Officer at Ancora Advisors LLC a SEC Registered Investment Advisor.
The mention of specific securities, types of securities and/or investment strategies in this newsletter should not be considered as an offer to sell or a solicitation to purchase any specific securities or to implement an investment strategy. Please consult with an Ancora Investment Professional on how the purchase or sale of specific securities can be implemented to meet your particular investment objectives, goals, and risk tolerances. Past performance of these types of investments is not indicative of future results and does not guarantee dividends/interest will be paid or paid at the same rate in the future. The data presented has been obtained from sources that are believed to be accurate and credible. Ancora Advisors makes no guarantee to the complete accuracy of this information. The indexes discussed are market performance indices and are not available for purchase. If you were to purchase the securities that make up these indices, your returns would be lower once fees and/or commissions are deducted. Past performance of these indices is not indicative of future results of the securities contained in these indices.
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