I don't often have the opportunity to watch a lot of TV, but this time of year, I make an exception for playoff baseball and the World Series.
This year, watching the Red Sox grand-slam their way into the World Series has got me thinking back to a couple of recent conversations I've had with two high-net-worth individuals from different parts of the country. These people are from very different backgrounds, but both have made very large, high-conviction investments within the past couple of months, one in real estate, the other in a venture capital situation. In both cases, the investment comprises well over 50 per cent of the individual's total net worth.
Essentially, these individuals are "swinging for the fences" with their portfolios, looking for an investment "grand slam."
Now, I should say that both of these investors are exceptionally smart, financially savvy people, successful and well-versed in their respective industries. While I don't have a professional perspective on the quality of their respective investments, what I can say is that their approach to investing – trying for the home run – is fundamentally different from the one I suggest to high-net-worth families.
It's well known that the big home run hitters are the ones who tend to strike out more. In my experience, this is true in investing as well. High risk, high return investments get the headlines, but they're also the ones that have a higher probability of a strike out (maybe it's better to call these "home losses" in an investment context).
Focusing on investments that offer lower return potential, but a higher probability of success – "singles and doubles" – may not be as exciting, but is usually much more effective, particularly over the long run.
I admit it: in my personal portfolio, I've swung for the fences from time to time. But looking back, the majority of my investment success has come from singles and doubles type of investments. And this is the approach I take with clients, particularly ones who have already hit their financial home run by building up a successful business (or two), creating a significant amount of wealth, and going through a liquidity event or two already.
I believe every investor should use the same approach. Reaching retirement, receiving an inheritance, selling the business you built up over the last 30 years – after you accomplish these goals, there isn't a lot of reason to keep on swinging for the fences. Most people would be better served by singles and doubles.
With that in mind, here are some tips for changing the way you think the next time you step up to the financial plate. By decreasing your desire for home runs, you may just end up increasing your batting average, or "on base percentage" instead.
Stick to quality
Some businesses are better than others. Same goes for fixed income investments; some issues are fundamentally better than others. In my experience, most investors should focus most of their portfolio on quality most of the time. (I didn't say all – I said most.)
In practical terms, the bulk of the portfolio should be in high-quality, dividend-paying stocks and credit from high-quality issuers (government or corporate). It's rare these will produce "home runs." But over time, all those singles and doubles will add up.
Look for high-probability themes (not "highly popular")
Too many investors think they only get "one pitch." As in, they get one chance to make one investment based on one idea. Myself, I've always found it easier to invest in themes or trends, and then pair that theme with companies and/or assets that stand to profit from it.
This is a strategy we employ in our client portfolios. After 2008, we had a conviction that high-yield bonds would produce outstanding returns; we did very well for clients on that one. Emerging markets growth was a theme that drove the Canadian market for some time. And the resurgence of the U.S. has been a theme we've been putting money behind since the 2009 lows. All are examples of high-conviction themes that didn't require you to go stock picking – diversified baskets, indices, or low-cost ETFs worked just as well.
Be cautious about binary outcomes
A binary outcome is an either/or proposition: you either win or you lose. Investors need to approach these with caution. By their very nature, they are "swing for the fences" kind of investments.
In some sectors, binary outcomes are the norm. A biotech startup is a classic example; either the drug works or it doesn't. You can see it in high tech too; either the Z10 sells or it doesn't. Here in Canada, there are hundreds of junior miners and O&G exploration companies that are largely binary outcome plays.
Can you make money in these? Absolutely. But for every home run you hear about, there will be dozens of home losses you don't.
Keep speculation small
I get it, investing can be exciting. And hitting a "home run" investment once in a while – that's often the most exciting of all. I feel this way sometimes too. But I'm careful to keep this emotion where it belongs; in a very small corner of my portfolio (or "field").
Some investors never feel the desire to speculate. But for those of you who do, set some limits. Assign no more than five per cent of the portfolio to home-run ideas. Segregate such money into a different portfolio or account. And don't even think about leverage or margin. These simple steps will allow you to swing for the fences once in awhile, without having to worry about striking out with the bases loaded.
Once you have amassed a certain level of wealth via a few home runs (business sale, inheritance, property sale, etc), it's important to keep your eye on the ball and focus on safer plays.
Thane Stenner is founder of Stenner Investment Partners within Richardson GMP Ltd., as well as Portfolio Manager and Director, Wealth Management. Thane is also Managing Director for TIGER 21 Canada (www.tiger21.com/canada). He is the bestselling author of ´True Wealth: an expert guide for high-net-worth individuals (and their advisors)'. (www.stennerinvestmentpartners.com) (Thane.Stenner@RichardsonGMP.com). The opinions expressed in this article are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Ltd. or its affiliates. Richardson GMP Limited, Member Canadian Investor Protection Fund.