Beyond The Headlines

Fighting the currents; a metaphor for the next decade of stock investing

We see at least five broadly held principles or tactics that have often worked well so far but could cause real trouble ahead: diversification, the “buy and hold” approach, passive investing, short-term thinking, and equating volatility with risk.

January 28, 2019 | Diandra Ramsammy
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Our readers may remember that I love water, and especially scuba diving. I recently had the pleasure of logging in a few dives in the South Pacific, an experience like none other. We were dropped off at the opening of an atoll (a ring-shaped coral reef), where the ocean regularly pumps water through a half-mile wide, 100-foot-deep canyon, only to claim it back later in the day. That peculiar phenomenon creates a treacherous current that makes divers feel helpless as pebbles in a mountain stream.

As I was caught by this monstrous current during my recent dive, visibility dropped to a few feet, leaving me clueless as to where the ocean was taking me. None of my extensive diving experience, the hundreds of dives I’d completed, certificates of all kinds, was any help at all. The dive guide’s briefing, ahead of time, had warned us of this in advance. Still, as the current grabbed me, I remembered Mark Twain’s famous words —“What gets us into trouble is not what we don’t know. It’s what we know for sure that just ain’t so.” In that warm atoll, all my experience could have gotten me in trouble because I was in an environment with many completely new conditions. And that’s exactly how we at Sicart feel looking at the stock market environment today. In some respects, it looks familiar, yet it’s different enough from the past to get us into real trouble if we don’t pay attention.

We see at least five broadly held principles or tactics that have often worked well so far but could cause real trouble ahead: diversification, the “buy and hold” approach, passive investing, short-term thinking, and equating volatility with risk.

Diversification of investments is not enough; holding cash matters

Diversify, diversify, diversify – it’s a fundamental rule of investing. There’s a widely held belief that the more stocks, asset classes, sectors, and geographies are represented in a portfolio, the better. But in 2018 almost all asset classes produced negative returns for the year, something we haven’t seen in the history of finance. Maybe diversification is no longer the answer. In expectation of such a correlated sell-off of all assets, at Sicart we chose to do something controversial: we held more cash than usual. And while many asset prices lost value, cash did not, allowing us to put it to work while others panicked. We strongly believe that cash and cash equivalents, especially with today’s slightly higher interest rates, should be part of asset allocation, and should be seen as a truly uncorrelated asset that may come in handy over the next decade.

“Buy and hold” may not work, but stock-pickers will do well

As investors, we look for durable, increasing streams of cash flows generated by businesses that can grow and be profitable for as long as possible. The number of companies and industries that remain somewhat insulated from changes in technology and consumer preferences is diminishing, while the rest struggle to stay relevant amid “creative destruction.” This leads to an ever-shorter time span during which any major corporation can dominate the business world. Their tenure among the largest 500 companies has declined from 20 years (in the early 1990s) to under 10 years today. Buy and hold won’t work as well as it has. We see the next decade as an opportunity for true stock pickers who do their best to continuously stay ahead of the change, and who are more likely to capture the upside potential of newer, promising businesses.

Passive investing may fail as active managers could shine again

The last few decades have convinced us that being passive investors is the lowest cost, and the best choice to make. We have seen interest rates drop from 20% to almost 0%, half of the world rejoin the world economy after the Berlin Wall fell, and many more countries chose the path towards a free market economy, and a democracy.  Globalization took a major leap forward, lowering costs and opening new markets, with demographics helping boost the world economy as well.

But now, with interest rates trending up, the EU losing a major member, trade wars being fought, and demographics working against the market, many tailwinds will start to fade. For the next couple of decades, passively riding a wave of prosperity won’t be an option. US investors have been spoiled with a decade-long government-sponsored bull market fueled by ever-lower interest rates and ever-higher debt levels. If we look at European stocks or emerging markets, we’ll see that the US bull market was more of an exception than a rule and could easily be replaced by the sideways market trend of the rest of the world. In such a world, passive investors may be disappointed, while active managers will continuously look for and likely find new opportunities.

Short-term promises versus long-term success

The last ten years may have blurred the line between true investing (skill) and mere speculation (luck). With stocks rising higher and higher, and the investment horizon shrinking from years to months, many investment advisors and their clients might be in for a rude awakening.  In today’s market, it’s not possible to deliver the speedy gains some investors are used to. In addition, advisors may lose clients who haven’t adjusted their expectations to a more long-term focus. We see the next decade as promising for those who take a long-term view, recognizing investing as business ownership rather than trading paper for quick gains.

Volatility is not risk, it’s an opportunity in disguise

At some point the idea took hold that volatility — the movement up or down of a stock price –was an indicator of risk. In other words, if the stock price moved a lot, it was a risky investment. Many pricing models are built around this concept, facilitating billions if not trillions of short-term bets to be made on price movements.

In fact, a permanent loss of capital is the true risk — not volatility. If I buy shares in a company whose shares don’t move much, and the underlying business is eventually exposed as dead, fraudulent or bankrupt, my risk is the loss of my entire investment in that company. Its price movement until its ultimate demise has no bearing on the actual risk of loss I took on. Here’s another example: let’s say my stock moves up and down a lot, but I believe that it should be selling for 5 times the current price. If, in the worst case I sell it at cost or with a small loss, my risk is limited and small while the upside is very attractive. If anything, volatility creates opportunities for patient buyers to go shopping when others panic.

We believe that today’s lighting fast, tech-powered stock markets aren’t built to handle the growing political and economic instability, and if anything, they exacerbate the price movements in both directions. We see the next decade as offering an unprecedented pickup in volatility that will serve us well as we seek out more investment opportunities at great prices.


I made the best of out of my brief atoll scuba diving experience. Despite the bumpy start, the adventure ended happily, but only because we took the dive guide’s words to heart – “it’s nothing like any diving you have ever seen before.”

Looking at the stock market today, we say the same: what is ahead of us is nothing like we have ever seen before… let’s pay attention and act accordingly.

If you go diving in the South Pacific, pick the right guide, and if you are investing in stocks, pick the right advisor. Remember Mark Twain’s words because what we think we know for sure possibly ain’t so, and while there might be trouble ahead for many, we expect to find opportunities instead.


Happy Investing!

Bogumil Baranowski | French Polynesia



This article is not intended to be a clientspecific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.