• Henri Caron

Long term investing - Some food for thought

If I were to make the analogy of flying different types of airplanes, I would be that big Boeing or Airbus jumbojet, flying long haul. Characteristics of that type of flying include having a destination in mind, being able to calculate an approximate timeframe of reaching it, and flying at a steady speed and altitude. Typical to that type of flying, is the high level of safety, quite limited human intervention, and turbulence. I aim to reach my destination —being the Caribbean, retiring on my investments— within a timeframe of let’s say 20 years. Based on S&P500 historical data, I know that market conditions allow me to easily achieve +/-10% return annually on average. My responsibility as a long-haul pilot is to optimise my flying route, and try to achieve a better performance compared to those indices’ average returns. However, because the average market conditions are favourable and are supporting me forward, even if I’m performing very bad as a pilot, I should be able to achieve fairly positive returns on the long run.

The chances of encountering turbulence on my flight to the Caribbean is high. I will experience moments of small turbulence, like in March 2018, bigger turbulence like we just had in October 2018. And based on historical data, I know I can expect very heavy turbulence every 9,1 years on average, and that it has been 9,5 years so far that we are in favourable conditions. As a long-haul pilot, I have the option to either land my airplane and sit out that potential turbulence (divest my portfolio into safer assets), or I can decide to fly forward and manoeuvre the best I can through the turbulence. Points to take into account is that landing my plane could be the safest option, but I would be missing out on favourable conditions that are usually preceding or succeeding heavy turbulence. Plus it could take longer than expected for the turbulence to reach me, for which I could also lose the upward potential of favourable conditions. Not maximising the favourable conditions can be at least as bad in terms of not reaching my destination in the most effective way. As much as I would like to avoid them during my journey, suffering some turbulence is unavoidable.

On the other end of the spectrum, there are stunt planes. Characteristics of that type of flying include short flights, creating a lot of excitement by executing rightly timed dared stunts. Typical is that stunt pilots have to take into account turbulence and air pockets, and use those physical occurrences to their advantage. Stunt planes can definitely bring a lot of excitement to the table, and very good stunt pilots can achieve massive results, however they require much more human handling, precision and experience, and offer less safety compared to long-haul flying. Accidents and crashes in stunt flying occur more often than with jumbojets, and as such it is important to choose your stunt pilot with more care.

Is flying long-haul better than flying stunt? There are critics and advocates on both side of the spectrum, and I think there are some interesting examples of good flying on both sides. Remember that both types of flying come with advantages and disadvantages, and that risk equals returns. That is: the higher returns you can potentially achieve, the higher the potential losses. You can’t expect long-haul pilots to perform like stunt pilots and vice versa. You can’t expect a jumbojet to execute a looping, nor can you expect the the same level of safety of flying long-haul than flying stunt planes. The main questions you have to ask yourself is if you chose the right kind pilot for the destination you want to reach, and if you trust him enough to bring you there. What I see much too often though, is that a portion of my passengers (copiers) take their parachute as soon as we have had some turbulence and jump out of the plane. On the other hand I acquire most new copiers when I just performed strongly. Don’t get me wrong, I have all the respect for copiers leaving me to invest their money in other people/assets if that pertains to their vision, but too often I have the impression that people join and leave me for short-termed visions. In selecting your Popular Investors to copy, yes you should have a look at his/her past performance, but more importantly try to assess how that person’s style will perform in the future. Try to assess if that pilot can bring you to your destination and if you trust him. Research has shown that only a very limited number of people have managed to consistently outperform the market, i.e. that in most cases the winners of today will be the losers of tomorrow and vice versa. By panicking and/or switching pilots every time there’s a turbulence, you will end up making emotional decisions, selling low, buying high, and paying a lot of trading fees.

Some food for thought.


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