Expectations vs reality

You may have seen by now that this will, very sadly, be the last week when I write to you via this newsletter, UK Uncensored.

It’s been a wonderful year, trying to navigate these crazy markets. I do hope you’ve found it valuable and/or interesting!

You can continue to hear from me, if you so wish, at Exponential Investor, alongside my brilliant colleague Sam Volkering. There are also some other, very exciting things in the pipeline, which you should be hearing about soon…

Today though, I’d like to look at one of the most important things in investing – quite an unusual one.

The first book I ever read on investing was The Most Important Thing, by Howard Marks. It’s incredible, a must-read.

Reading Howard Marks before any other author on the topic of investing has certainly shaped the kind of investor that I am now, many years later.

It’s the basis of my understanding.

The cyclical nature of markets, and of human psychology, form the bedrock of my investment philosophy.

I have also read Nassim Taleb’s Fooled by Randomness, among other titles.

This has opened my eyes to the destructive nature of “tail risks” or huge, unforeseen structural risks.

I believe I am allowed to share a small personal investment story.

When markets crashed last year, bitcoin crashed. It was then, even not knowing a huge amount about it, that I finally bought a tiny bit, to participate in this great thing (for the first time since losing 50 quid back in 2017!). I just felt that this panic would fade, and the long-term benefits made the short-term risks worth taking.

Recently I have been getting much more cautious, and, I admit, have sold most of my little gain over the past month or two, sharing my concerns with you along the way.

Inflation, speculation, interest rates and the arrogance of bitcoiners all freaked me out, to be honest. I still have a bit of course, because I still believe it could go above $100,000 per coin, or that it could act in an uncorrelated way around market crashes. What remains is of the long-term variety.

Reading Howard Marks made me an investor who wants to buy when people are panicking, and sell when they are gloating.

I know that I am like that. I have thought about what kind of investor I am, one who is happy to call it a day before the party’s over.

When I sold, I didn’t mind if bitcoin kept going up. And the last thing I’ll do is buy back in if it does!

The point is that my experiences have shaped the investor that I am.

I was first learning about stocks and companies and markets as a teenager in the aftermath of the global financial crisis.

I learned about systemic risks, about the greed inherent in many financial institutions, and about the crippling effects that stock market crashes can have on the real economy and real people.

I watched films like The Big Short, and read books like The Great Crash 1929 to learn about other similar events in history.

All the while, with Howard Marks’ keen understanding of cyclicality in markets and human nature front and centre of my mind.

As a result, I look at investing as a deeply challenging and complex task in which the stakes are very high.

Foremost in my mind is to avoid the life-altering losses (and possibly career-ending mistakes) that come with arrogance or complacency in the face of large risks.

Avoiding the once-in-a-decade type of risk events is a core part of my investment philosophy.

I am also very comfortable sitting out of the current chaos and speculation in markets.

I believe that the opportunities for those with a portion of cash to reinvest after a crash will be truly excellent.

It also makes me automatically keen on gold, as something that can hold its value and offer resistance during turmoil.

In his book Solve for Happy, former chief engineer of Google X (the moonshot department) Mo Gawdat comes up with a formula for life and happiness.

He says, “The Happiness Equation is: your happiness is equal to or greater than the difference between the events of your life and your expectations of how life should behave.”

Focusing just on the investment implications of this, it follows from my extreme aversion to potentially systemic risks, that I cannot also expect the very highest returns when markets are happy and cheerful.

That’s a natural trade-off that I expect and accept, and that helps me to avoid the “FOMO” (fear of missing out) which often drags participants back into the market just as the bull market is reaching its final crescendo.

Ultimately, I know what I fear, and what I’m aiming for, and the outcomes that these positions mean I have to accept.

All told, this is just me saying what kind of investor I am and what I therefore expect.

But you might be entirely different! And that’s totally fine!

There is no single way to invest.

Maybe all you want is to ride the stock market where it goes. You’re happy to enjoy the good times and suffer the bad, accepting the drawdowns as fair payment for higher returns in between.

Or maybe you’re totally focused on one thing – like crypto, the energy transition, or gold.

I advocate “true diversification” which should help to reduce monthly or annual volatility in your portfolio, but if you only want to invest in precious metals and miners, that’s fine too – as long as you know you may not do as well during deflationary periods, or when interest rates are rising.

That’s why I really believe in our business model here at Southbank Investment Research.

We believe that you are the best possible investment manager you could wish for.

As a result, we try and put the cards on the table, and leave it to you to pick some up.

With a focus on education and high-quality content, alongside specific stock, crypto, and fund recommendations, our services believe that only you truly know what’s best for your money.

All I ask is that you take the time to understand what kind of investor you are, and then manage your portfolio accordingly. That way, when the going gets tough, your investments will be well aligned to what you truly deeply believe in.

If you are a firm believer in the benefits of technology, you’ll be able to cope through the deepest bear market because you trust that in the long term they’ll outperform.

(This is how I feel about energy transition stocks at the moment. Struggling a bit of late, but my long-term conviction is so high that I’m happy to just sit patiently and wait for the trend to grow.)

Or, if you are very risk averse, having a lot of cash and gold and even cheap, value stocks will be tolerable when tech is soaring, because you just know that those kinds of investments aren’t for you.

Warren Buffett famously never invests in the technologies that he doesn’t understand.

And what that means is he missed out on some great companies in the 1990s. But then he also avoided the catastrophic losses inflicted by those same companies.

People in tech are gloating again that Buffett is a fool for staying out of this great bull market, but he may well have the last laugh…

He knows himself as an investor, and this helps him to keep his discipline, and keep his focus on executing his own strategy well – not trying to copy anyone else or chase the gains of his peers.

I wish you all the best in achieving a similar level of conviction in your own investing.

In the meantime, I should re-iterate that this is now, tragically, my penultimate issue of UK Uncensored.

I have loved writing to you this past year, and I hope that some of my more unusual views have proved new, interesting or helpful to you in your investing.

After Friday, I will be continuing to write regularly for our sister publication, Exponential Investor. I would absolutely love it if you’d stay on and join me.

You can do so here.

There’s so much to navigate in the months and years to come, and I will be dedicating myself, as always, to keeping your money safe and finding the very best opportunities to grow your wealth in the meantime.

Alongside the brilliant Sam Volkering, Exponential Investor has so much to offer, and I believe you’ll really love it.

So come and join us!

Very best wishes,

Kit Winder
Editor, UK Uncensored

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