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Paths and destinations

Readers,

What a year. Again.


And already, it would seem.


Putin is holidaying on Europe’s doorstep, an area so dangerous he saw fit to bring along 150,000 troops and several armoured divisions. It turns out inflation is not transitory and reached 7% in December - you heard it here first. Markets, having been higher than Charlie Sheen on an 18-day bender, are now firmly in the comedown phase.


Challenging times for investors, indeed. I thought the time is ripe for a discussion of navigating these turbid, shark-infested waters.


Investing is often characterised as a highly competitive game, a tussle between you and everyone else. While there is some truth to this statement, your worst enemy cannot be found camped behind a Bloomberg terminal thieving your hard won alpha, it can be found within. We are not rational people at the best of times, and even less so during the highs and lows of a market cycle. Investors need plans for these occasions otherwise we’re likely to perform below our potential. Without a plan, we’re going into these fluctuations and doing whatever our brains think we should in the moment. Without a plan we’re likely to end up capturing the worst outcomes of the path of prices and miss out on the best outcomes of their destination.


As I write, the MSCI has fallen 7.5% from its high, while the NASDAQ is off 12.5%. Under the hood, the carnage is widespread with growth stocks looking like they’ve been set on fire and put out with a hammer. But amidst the chaos, there is opportunity for investors who have planned ahead. At times like these, the seeds of future gains are sown.


As I look through my watchlist, many stocks are starting to look cheap. The drivers of their cash flows and fundamental value remain unchanged. I’m seeing prices that don’t demand much of the future and I’m thinking it might be time to go shopping.


Am I feeling a bit wary? Of course I am. I’d go so far as to say anyone who can watch some of their holdings fall ~20% in the course of a few weeks and claim to be unaffected is either a fool, a liar, EXTREMELY rich or a crypto investor (perhaps I covered the latter under “fool”). I know that my risk appetite is lowered. If I was trying to make new decisions right now, there’s a chance they’d be sub-optimal. The good news is I don’t need to make new decisions, I can execute old ones. Everything in my portfolio and on my watchlist comes with a quantified, falsifiable thesis I wrote weeks or months ago during calmer times. There are clear buy and sell triggers. If the thesis is unchanged and the stock price is 20, 30 or even 50% cheaper, it might be time to load up.


Long story short, our risk appetite is lowest during market lows (when it should be highest, as lower prices make equity securities less risky) and highest during market highs (when you should be cautious). By planning ahead and deciding a course of action before we get to these points we end up avoiding the worst outcome of the path of prices and capturing the best outcomes of their destination.


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