Assessing the Investment Landscape

Climbing high hills for views to successful investing

If you're a "stock picker" (more precisely, selecting investments), you're likely interested in the financial, economic, social, political, and technological trends creating opportunities, and presenting risks, across the world -- I'm one. While I'm not enamored with the term "stock picker," behind every portfolio there's a stock picker somewhere in the portfolio construction process, whether it's an individually managed portfolio, a mutual fund, an index fund, or a portfolio full of exchange traded funds (ETFs).

There's something of which I am absolutely certain -- the less constrained we are, the larger our capacity for independent action and the greater our ability to respond to opportunities and deal with risks. In order to gain proficiency in stock picking and achieve the benefits of independent action so we can survive and prosper on our own terms, we have to become more fit by climbing high hills for a more thorough view of the terrain below.

“I think you have to learn that there's a company behind every stock, and that there's only one real reason why stocks go up. Companies go from doing poorly to doing well or small companies grow to large companies.” ~ Peter Lynch

In today's environment, it helps to be a stock picker. The economy is in rough shape, and it appears to be muddling along. Most investors have had mediocre to miserable returns over the past 10 years, especially 2008, and over the past few months it seems we’re back to more of the same. Even savers are discouraged, taking it on the chin from the effects of incredibly low interest rates. People look at the stock market and see heightened volatility and risk. People look at Washington DC, Congress, their state capitols, regulators, and bureaucrats and see talking heads that are out of touch with their constituents.

My point here is that it’s tough to be optimistic. But that’s not so with many companies. I feel good about every company in my clients’ portfolios and the people running these companies. I have an optimistic story about the underlying business and the opportunities ahead for each of these companies. Yes, there’s uncertainty over the global macro outlook, but there are specific underlying trends affecting each portfolio company that leads me to optimism.

For a lot of ordinary people, the economic recovery doesn’t feel real. The last few years have truly altered Americans’ sense of financial security; the notion that stocks tend to be safe and profitable investments over time seems to have been dented in much the same way that the decline in home values and in job stability have added to our woes.

Investors are losing the granularity of insight into their portfolios; most don’t know how their portfolio holdings can escape the effect of the macro environment. They see a mass of portfolio names or a listing of mutual funds about which they have no idea as to what drives the fortunes of the contents of their portfolios. Therefore, their optimism, or pessimism, is controlled by a macro environment that is tough to get optimistic about.

In a similar way as a proper diet and exercise helps keep one fit, investment fitness is dependent upon discipline and fortitude to climb the high hills out of the valley to assess the investment landscape, a bird’s eye view if you will. By continually monitoring trends that will affect the landscape (gaining new insights and rejecting others as unimportant), the better prepared we are at ascertaining the associated investment opportunities and risks.

To participate in any wealth creation characteristics of the trends we spot, we will probably have to identify an industry or individual company participant that we believe would be a beneficiary. We have to ask ourselves if we’re fit to make a judgment on what characteristics are best suited to produce a positive outcome, what should be considered a smart move by management, and how an industry or individual company (or even a specific market or asset class) is tracking with the opportunities presented by the trend. If we aren’t fit enough for the job, we won’t be in a position to benefit.

Therefore, for every wealth creation idea that we have, every trend we spot that appears to have investment potential, and for every investment vehicle that we think is linked to our wealth creation ideas and trends, we need to think about the associated landscape we have to climb. We need to get on a higher hill than other investors who will be assessing the same situation and taking action. Only then will we see the green valley that lies beyond most investors, unless they’re fit enough to tackle high hills as well. If you do this, your investment performance should markedly improve.

Comment on this article—name and email are required (*)