Lessons From the Art World and Beyond
Q4 | November 2022
November 21, 2022
Image used with permission: iStock/kutaytanir
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Lessons From the Art World and Beyond
Q4 | November 2022
“Exactitude is not truth.”
I began my career on Bay Street in 1982 trading Government of Canada bonds at what was then called Dominion Securities.(1) It was a simpler time. The bond market was a loose, free-wheeling environment and filled with characters who had toiled through the vicious bear market engineered by then Fed Chairman Paul Volker to stamp out the ravages of inflation. People smoked at their desks and drank at lunch. Foul-mouthed tantrums were commonplace. Many of the most senior and capable traders on the street had little formal education. Analytical calculations used ponderously slow bond calculators, of which there might be only one or two on a desk of six or seven traders. Risk management was primitive at best. Neither credit nor duration exposure was accurately quantified or tracked. We established trading positions based on a limited amount of stale economic data and a very limited understanding of economics. Our trading room was driven by a singular focus on the short-term. Alas, unbeknownst to all of us, we were on the cusp of one of the great bull markets in history – basically a 40-year one-way trade where yields declined from 18% to 0.50%. It was a trend that supported many careers and many egos. Ahh, those were the days!
Eventually though, a degree of sophistication arrived in the trading room. The introduction of personal computers with specialized math chips made calculations more widely available and accurate. As a result, trading desks came to understand far better the risks they were assuming and how to hedge their exposure when needed. By 1988, I was working at JP Morgan, running a trading desk under the exacting eye of a transplanted Frenchman, Hervé Huas. He had an impeccable education, considerable comfort with financial math, and he applied both math and logic to the decisions made in the trading room. I remember him exhorting me, “Geoff, 2 + 2 equals 4. Not a number between 3 and 5!” In a short period of time, precision came to matter in a trading room. Those who embraced it were successful and made arbitrage profits. Those who continued to pursue gut feel and hunches eventually succumbed to trading losses.
Investing and trading are fundamentally different.
I left JPM in 1995, and joined Nexus in 1996. In my time here I have been fortunate to work with individuals who bring a lot of brain matter to the analysis of securities and portfolios. No smoking, no drinking and no foul-mouthed tantrums! One of the first things I learned when I was getting started, was the difference in time horizon necessary to make good decisions. We discuss daily news developments, but we invest for the long-term. Our investment decisions incorporate an assessment of many factors including: an understanding of what drives business profitability and growth, the quality and experience of management, and valuation of the security in question. There is almost no discussion of the short-term. It is a qualitative as well as a quantitative process. By design, it is entirely different from what happens on a trading floor. In fact, the pursuit of precision, so necessary on a trading desk, can in fact be the enemy of long-term investment success.
Impressionism or Still Life.
Why might this be? The answer is straight-forward. It is because portfolio managers are always and unavoidably making decisions in an environment of uncertainty. When you are investing for the long term, you must accept that there is likely to be a wide difference between your expectations and how the world unfolds. In this respect, it is the words of the French Impressionist painter Henri Matisse, rather than my former boss, Hervé Huas, that are more instructive. Matisse declared, “Exactitude is not truth.” This is true for great artists and it is great advice for portfolio managers. The “art” of portfolio management is in the style of the Impressionists and accepts that demanding the precision of a “still life” painting subtracts from the chances for long-term success. The world does not sit still for the portfolio manager.
Portfolio Management – A Marriage of Art and Science
A good portfolio manager understands that the future is unpredictable, and that forecasting is helpful for context, but not essential for long-term investment success. There are qualitative (art) and quantitative (science) aspects to creating properly diversified portfolios. The trick is to be able to blend both skills together. It is a balance that our investment team works at constantly.
Another practical method to raise the probability of long-term success is planning. The wealth planning process is inherently focused on the long term. When laying out the financial requirements over the span of a client’s life, it is easier to avoid the temptation of short-term investment decision-making and more natural to consider the appropriateness of a long-term investment approach.
The world seems an especially unsettled place these days. The issues that inject an air of uncertainty cover a broad spectrum of worrying health, geo-political, and economic news. It is an environment where it is hard for investors to keep a long-term focus. It is tempting instead to concentrate on the short-term. But, over the arc of my career, I have come to strongly believe that such a temptation is unrewarded in the long term. Having a long-term plan and sticking to it is the best way to raise the probability of long-term success.
(1) Now called RBC Capital Markets.