Evolution | Market Performance | That Oscars Mishap
I'm fascinated by evolution. Learning about how and why a few lucky species survive, while the other 99.9% don't, provides a lot of insights----- particularly into why the surviving specie do the things they do, and act the way they act (including humans).
One of evolution's biggest lessons is the significant role geography and environment plays in determining the winners and losers of the evolutionary process. For example, during historical periods of drought, the species that had the ability to survive on less water survived and passed on their genes, paving the way for offspring with an even greater ability to thrive in water-deprived environments. Rinse, wash, and repeat dozens to thousands of times and, sooner or later, you have a new species perfectly adopted for the current environment----- that is, until it changes again.
Like geography and climate, other types of environments can help determine who succeeds and who fails, such as, market and economic environments. See where I'm going here? Investing is a field largely affected (among other factors) by the latter two environments. For example, during the roaring '20s, the economy and stock markets went up year after year. Aggressive investing behaviour was heavily rewarded, while conservatism usually caused an investor to lag behind.
However, when the economic climate changed dramatically during The Depression, the risky behaviour that had been "naturally selected" during the environment of the boom years, conversely caused bankruptcy and destitution in the bad ones. Instead, years of conservatism were finally rewarded to those investors and business people able to make their fortunes buying businesses at pennies on the dollar.
The challenge is that although we know investing environments change, we don't know when this change will happen, what the cause will be, or how long it will take. Investing in the housing market, dividend-paying stocks, bonds, and, more recently, "low-beta" products have done very well given the recent environment, and many people feel this will continue indefinitely. But there will come a time, maybe next year, maybe 20 years from now, when that changes. And when it does, the change may be mild, but it may be worse.
As investors, it's our job
to proceed in a manner in which we make sure the current environment doesn't fool us into playing the financial version of Russian roulette. A strategy is not conservative if every year you have a 95% chance of winning, but a 5% chance of bankruptcy. Played enough times, the chances of you losing everything at some point increases to a near certainty.
It's best to keep your portfolio diversified and regularly rebalanced, and don't forget about black swans. Those that are really wise, look for strategies in which they can benefit from bad times. Although The Great Depression financially ruined most people, there were a small number who made their fortune during it.
A friendly reminder...
Although the RRSP deadline has passed, you can still contribute to your TFSA whenever you like. Feel free to
if you have any questions.
2017 market update
The Canadian Bond Index has been mildly negative, while the Corporate Bond Index has been slightly positive. Globally, equities and commodities have largely been positive since the beginning of January.
In the review queue
The Way of Kings
by Brandon Sanderson:
The first book of the Stormlight Archive series is a wonderfully imagined fantasy novel. I've been a fan of the genre since my university days and if the next books hold up to this one's standard, it will be a very special series. Cautionary note: the book is over 1,300 pages, so it definitely requires a degree of commitment.
The Everything Store
by Brad Stone:
A fascinating and objective look at the rise of Amazon and its founder Jeff Bezos. Bezos appears to be cut from the same cloth as other great technology leaders such as Steve Jobs and Elon Musk, not only in his fanatical dedication to his company and customers, but also in his ruthless approach to dealing with employees and competitors.
Everyone is Still Learning
by Morgan Housel:
A great reminder that investing and financial planning are still fairly young fields. Although we know a lot, there is a lot more we don't know, so proceed with caution!
- Envelopegate: What really happened to cause the Oscars mishap on Sunday?