Business

Winning The Ultimate Game

By David C. Knipe, Temple Asset Management Ltd.

Recently a new client expressed some concerns about the level of the stock market. The client was wealthy, and experienced in the ways of the business world. He was contemplating a large equity investment and had only one concern–he did not want to be suckered.

We talked about this at length, and his definition of “being suckered” was buying into the market today, and having it go down tomorrow. Given that this particular client’s objectives were relatively long term in nature, well over 15 years, and that the amount going into the market was only a small percentage of this individual’s holdings, a possible short term correction in the market would not have significantly affected his total holdings nor his long term goals. The real issue was not the market going down in the short term, but the loss of pride.This individual simply did not want to consider himself a loser.

Since the majority of investors that I see today have basically the same concern–the fear of losing, then it could be said that most investors consider investing as a type of ultimate game. However, in this unique game nobody has to be a loser. Instead, every player can win by understanding the fundamentals of the game and using them to their advantage.

THE GAMEBOARD:
The Ultimate Game’s playing field is today’s easily accessible financial markets. These include, for the majority of players, the stock, bond and money market investments available in one form or another. Although the bond and money markets are significantly larger than the stock market, the hype and attention the media puts on the equity markets causes investors to be most concerned with the stock market and its movements.

OBJECTIVE OF THE GAME:
The basic goal of the game is to move around the playing field in a manner that causes the player’s wealth to increase the most over the long term.

RULES OF THE GAME:
Other than the necessary regulation to eliminate cheating and ensure a level playing field, there are no rules! Players are free to do with their wealth what they choose.

THE GAME PIECES:
There are two elements to the game pieces. One is the investor’s wealth, the other is the investment vehicle in which the investor chooses to place their wealth. There are countless pieces for the player to choose from, and there is no limit to the amount of pieces that may be put into play at one time.

HOW THE GAME IS PLAYED:
Each investor places all or a portion of their money into investments of their choice. The pieces are then simultaneously and perpetually moved around the game board, shifting money into promising investments while avoiding those that seem to have the least upside, or the most downside risk. A player may buy, sell, trade, or switch pieces at any time.

THE USUAL CAST OF PLAYERS:
There are four main types of players that play the Ultimate Game:

The Eternal Optimist:
These players believe that the markets will go up in a straight line. They believe that if an investment has doubled every year for the last couple of years, it will continue to double each year for the foreseeable future. Although this player may sometimes gain over the short term, it is unlikely that they will ever win the game for two reasons. First, their expectations are unrealistically high and second, optimists have no plan to deal with markets when they do move down.

The Perpetual Pessimist:
These players believe that the markets are always too high, and that a major correction is always imminent. They are most likely not to invest, even after a significant correction has occurred. Perpetual pessimists never win the game. They choose only to worry about the game, but never really play it.

The Lemmings:
These players make up the largest portion of all the players involved in the game. They believe that whatever is happening today will happen tomorrow, and that the crowd is always right. They are the players that are eternal optimists one day, and perpetual pessimists the next. They are likely to jump over a cliff if that is what all other investors are doing! For obvious reason, lemmings are the most likely to lose the game.

The Strategists:
These players have an individualized strategy to deal with market ups and downs. They are disciplined in following their strategies over the long term, and have reasonable expectations of the returns they should be earning. Strategists always win the game because they capitalize on the mistakes that the pessimists, optimists, and lemmings eventually make.

THE WINNING STRATEGY:
To win the game, players must avoid falling into the trap of being either too pessimistic, or too optimistic, and absolutely at all costs must avoid becoming a lemming. They can do this through trial and error–which usually results in some costly mistakes–or by joining forces with a qualified portfolio manager to help them develop an effective strategy.

A competent manager will give the player an advantage by helping to focus on those elements essential for success. These include diversification, quality control, management strategy, and the discipline to follow the strategy.

Diversification
Diversification is the most effective tool for any player to use in the investment game. It is important that investments are not only spread among different equity investments, but also among different asset classes (cash and fixed income). Once the initial diversification process has taken place, it is necessary to continually diversify and mitigate risk. Most pessimists, optimists, and lemmings neglect this action at some point in the game, allowing the well positioned strategic investor to ultimately gain the advantage and win the game.

Quality Control
Controlling the quality of investments within the portfolio is essential to winning the game. It does no good to have even the most diversified portfolio if all the investments within it cease to exist. Long term oriented investors are wise to focus only on investments with the most proven track records, and the best future growth potential. These select investments are difficult to find, but they do exist and they provide the best overall returns in both good and bad market conditions.

Management Strategy
Most pessimists, optimists, and lemmings use only reactive strategies. Their decisions are based upon what is happening in the market today with no thought about what has happened in the past, or what is likely to happen in the future. Reactive strategies alone simply follow short term trends and provide no true advantage over the long term.

Instead, proactive strategies allow professional investors to take advantage of opportunities presented by the reacting player’s extreme actions. Because strategists have a longer time horizon, they are not forced to make quick and often severe decisions that may prove costly. Instead, strategists buy when the pessimists are selling, sell when the optimists are buying, and have fun watching the lemmings jump off the cliff.

Discipline
A player may have the most diversified portfolio, own the finest quality investments, and use the best formulated strategy to manage the portfolio, but without the discipline needed to strictly follow the long term plan, any playing strategy becomes ineffective, and the player becomes a lemming. For this reason, having a professional portfolio manager to help keep you on course throughout the game can give you a significant advantage.

No matter how many similarities investing has with being a game, it is not. It is real life and involves real money. The best strategy that any investor can make is to be prudent, and this means seeking not only the best investments and strategies, but also the highest qualified advice to help determine individual goals and develop a disciplined strategy to meet those goals.

By making the strategic decision to use a tax-free haven, the offshore investor has already gained a significant advantage. However, there is a little bit of optimist, pessimist, and lemming in every investor. The role of a disciplined investment strategy, and a qualified advisor, is to protect investors from the little lemming that is just waiting to jump off the cliff. To those investors who are worried about losing, hire the most qualified advisors you can find to help you play like a winner and succeed.

David C. Knipe, CFA is the Chief Investment Officer of Temple Asset Management Ltd. He graduated from the University of Calgary with a Bachelors of Commerce degree, and has over eight years in investment management experience. Since being awarded the Chartered Financial Analyst designation, he has worked exclusively with offshore investors providing managed strategies that combine long-term growth and the preservation of wealth. David can be reached at (649) 946-5296 or at asset@temple-group.com. Visit our web page www.temple-group.com.



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