Opportunities Where You Least Expect Them

Brett

POSTED BY

Brett Simpson

Financial Advisor & Chairman

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When we are young, we don’t know what we don’t know! Even as we age and gain experience and recognition of some things we may not like, be interested in, or be good at (usually a common denominator), we still don’t always know what we don’t know.

We all have “blind spots,” and these can be extraordinarily damaging when we take ac­tions that carry us into these unknown voids in our competence. These deficits can be based on knowledge, rational decision making, logical problem solving, or emotional intelligence, empathy, and perspective. Let’s face it, our blind spots can be limitless (especially in relation­ships!). So, there is an opportunity in self-awareness. First, to recognize “blind spots” likely exist. Second, to acknowledge we may not know what they are before trying to fix them. Finally, to openly seek out objective advice on mitigating their negative effects (even from a spouse!).

The opportunity to “know thyself” is a core principle in being successful in our education, work, relationships, and life planning. This is where the value of ad­vice from our teachers, coaches, leaders, co-workers, friends, spouses, and finan­cial advisors can change our outcomes for the better. We can avoid pitfalls and seize opportunities, but only if we can identify them. Without counsel and advice, we may be blind to whether we are in crisis or opportunity, on the brink of disaster or breakthrough, and what our next steps should be. This seems obvious if we know we need help. The value of advice, in all its forms, is immeasurable. Those who know their limitations seek advice, and prosper when the blind spot is revealed and solutions are implemented.

Yet, in financial services, the debate continues about the value of advice. Many young people trust Google or peer reviews for their advice; some un­aware they may be filtered or guided to solutions based on an algorithm. Some are choosing an algorithm, through robo-advice platforms, and entrusting its computer coding to do the right things at the right time, regardless of what the world throws at it. Sure, the price may be compelling, so is do-it-yourself dentistry, but the value when the cavities are discovered just might not be there!

It seems hard for some smart people to recognize that despite their own areas of proficiency, there may be some things in the vast area of financial services that are ”blind spots” to them. Finding out what they are before they happen can have a much greater value than the price differential between an accredited professional financial advisor and an algorithm. Other smart people recognize money, fi­nances, or planning is just not their thing, and the delegation and peace of mind are worth the price of admission.

In the first five months of the COVID-19 pandemic, more self-directed trading accounts have been opened up than in the five years prior. Many housebound would-be investors with time on their hands have decided it can’t be that hard to make money buying companies that are obvious survivors of the health-induced shutdown of the globe’s economies. “FANGAM” busi­nesses have seen their stock prices soar (Apple being the first company to exceed $2 trillion in market capitalization) while other less obvious survivors have languished. The top 10 largest companies in the S&P 500 index recently became 30% of the total market capitalization. Many price-sensitive investors have gravitated to buying ETFs (Exchange Traded Funds) constructed from these market capitalization–weighted indices over the last few decades, and without advice, they have been popular with the algorithm and do-it-yourself investors. By construction, these ETFs buy more and more of a company the bigger it gets. It gets bigger when its stock price trades higher. The methodology is buy more of it the more expensive it gets! Does that make intuitive sense to anybody?

This is not opportunity. Good companies are not good invest­ments at any price. Does anybody remember Nortel, Cisco, or JDS Uniphase in 2000? How about Lu­cent, Nokia, or MCI Sprint? In 2000, just before the technology telecommunications bubble burst, Nortel was 34% of Canada’s index, Nokia 70% of its index, and the 10 biggest US companies were 20% of the S&P 500, (current concentra­tions near 30% should give pause to ETF investors!). Microsoft was one of those 10, as it is now. In be­tween, its stock price went down for 15 years before becoming good value at ~$30 and rising to $225 re­cently. Nortel is gone, and Cisco’s share price has never recovered in 20 years, despite being a stronger company now than it was then. Buying companies because we like and use their products and serv­ices in a pandemic is not a good long-term strategy. It has not been at any time. Fundamentals matter.

We coach on emotional and behavioural “blind spots” to avoid panic during market sell-offs and exuberance during bubbles. More than 60% of the sell trades in the COVID-19 meltdown were ETF sells of all the index-represented companies. No differentiation. No fundamentals. DIY and algorithm investors sold without advice, ex­perience, perspective, and context. Few investors, left to their own devices, would have sold in panic but reinvested for the recovery. The price they saved on no advice would have been all lost, because timing the market is impossible. Advice recognizes and mitigates this behavioural disadvantage with processes to guide reaction and let value fundamentals govern the investment process. The opportunity and value lies in not jumping off a cliff with the herd. Can we open ourselves to coaching the behaviours we can control rather than predicting the things we can’t control?

Sometimes we might even need advice to discover the opportunity in knowing ourselves. ■