The best way to navigate news events is often to ignore them.DNY59/iStockPhoto / Getty Images
There’s a popular strategy that investing commentators use to attract clicks these days: “What to invest in during … .”
Whatever the headline news event is, there are plenty of people out there offering expert advice on how investors can best navigate it. Let’s try a recent hot topic – what to invest in during a trade war?
Or how about: What to invest in during the upcoming recession? What to invest in during high inflation? What to invest in during supply chain disruption?
Well, the best way to navigate those events is to ignore them.
For long-term investing in stocks, keeping a few characteristics in mind will produce the best results:
- pricing power and high profit margin: to offset and/or absorb potential cost headwind;
- long-term-focused, pragmatic, intellectually honest management with skin in the game: to quickly adapt to external shifts that are often out of control;
- market-leading position: to capture market shares from weaker peers;
- strong, conservatively run balance sheet: to weather any economic downturn and take advantage of stock-market weakness to repurchase shares.
Put simply, we look for high-quality companies. They are the exactly same set of companies we would turn to to deploy long-term capital no matter what the headlines were saying.
Two mistakes we made as portfolio managers - and what we learned from them
Now, some of you may wonder why not jump in and out throughout the market cycle?
First of all, just like the short-term stock market, macro events are hard to predict. But fortunately, we don’t need to predict them, nor would it be productive even if we were able to do so.
Let’s take a minute to imagine that at the start of 2020, Doc Brown of Back to the Future fame got you the opportunity to travel forward two years solely to read through the headlines of major newspapers. You would learn what was going to occur next: global pandemic, border closures, city lockdowns, supply chain disruptions, labour shortages and high inflation.
After you returned to early 2020, how would you plan to position yourself in the stock market? It may look logical to stay as far away from the market as possible. Nonetheless, stocks turned out to have had great years in both 2020 and 2021.
What the time travellers were missing is that the stock market is a second-order system, which is to say, it is not the future event – but the consensus view regarding the event – that matters in determining the near-term share price movement.
Since it is extremely difficult (if not impossible) to gauge other market participants’ perception with consistent accuracy, a laser focus on high-quality companies that would survive and even thrive when facing external adversities is the best bet for investors to harvest decent risk-adjusted returns for the long run, in our opinion.
On the contrary, any attempt to time the market based on macro forecasting could be costly (e.g., missing out in 2020/21). If Doc Brown ever offers you a ride to the future, just be sure to ignore all the news headlines when thinking about your investment strategy.
Jason Del Vicario, CFA, is portfolio manager at HillsideWealth | iA Private Wealth Inc. Steven Chen, MBA, is global analytics associate at the firm.
More from these authors:
How to find stocks with an ‘economic moat’
How to beat the pros, Part 1: Choose the right number of stocks to hold
How to beat the pros, Part 2: Simplify by focusing on stocks of high quality
How to beat the pros, Part 3: Identifying high-quality stocks
How to beat the pros, Part 4: A Canadian stock we think will continue to outperform
How to beat the pros, Part 5: Two stocks you never heard of that fit our investing strategy
How to beat the pros, Part 6: An off-the-radar stock from overseas that we think has great potential