Blue Elephant Capital Management

Find the answer investing

Do you ever find yourself watching financial TV as if it were a sporting event? I do. No matter how hard I try not to, I get caught up at times. The media machine is amazing. Stocks are down 1% today? They’ll have 22 hours of programming dedicated to experts who can tell you why and how much worse it might get, and 2 hours dedicated to those who disagree. Stocks are up 1% tomorrow? Just flip the guests.

So why do we watch? We rarely learn anything. I think it has to do with what I call “Find the answer investing.” We are conditioned to think of investing in the same terms as competitive sports. Turn on your favorite financial media channel and think about the programming like you would ESPN’s. They are trying to convince us that every market move can be explained like a football highlight. My favorite examples actually come from print media, where one minute a headline can say “Stocks rise with oil, on economic growth upgrade,” and 2 hours later can say, “Stocks fall as rising oil prices bring fear of consumer pullback.”

October’s bout of market volatility reminded me that in order to achieve investment goals, we must allocate, not trade. There was no way to predict that the 10yr note would move from 2.30% to 1.85% and back over the course of a few hours (I am told this was a 6-sigma event, which I think means you don’t make money betting on it happening too often). Traders will spend the next few months debating why it happened, but we’ll never really know. Allocators will ask a more important question – “Did I learn anything from the event that makes my investment decisions more or less likely to give me the returns I am looking for?”

Investing is funny. There is no right answer. It isn’t out there. No matter how much you read, study, pray, trade, watch, or pontificate, no one has the answer. If they did, they certainly wouldn’t be telling us. We’re not used to this concept – how do we make investment decisions knowing that there is no answer?

The first point that is immediately obvious is that you should not be reading this thought piece. The answer isn’t in here.

Since you’ve gotten over that, I do have a few ideas on what investing in an answerless world looks like.

  1. Set targets – How much do you expect to make? What can you afford to lose?
  2. Set limits – Are you willing to add to the allocation? What factors will make you admit the allocation is the wrong one?
  3. Check your emotion at the door – the market doesn’t care what you think or how you feel. Don’t celebrate your wins while ignoring your losses – keep to your targets and take down the allocation when targets/limits are reached
  4. Understand what is priced in, don’t be afraid to be contrarian – if you read it in the newspaper, heard it on the subway or around the coffee machine at work, be wary – it is most likely in the price already
  5. Make mistakes – I’ve never met anyone who loses money at online poker, but I have a sneaky suspicion people only discuss their winning hands. Be proud of your mistakes, especially the ones you were smart enough to cut and learn from.

Looking at this list, it makes sense why today’s media has no interest in discussing long-term investing. It is nothing like a sporting event, where there is a start, halftime, maybe a few beers, and a clear winner at the end. On the other had, investing is long, slow, best done sober and can have all different kinds of outcomes based on individual goals that are quite unique.

If nothing else, we are long-term investors at Blue Elephant. We live in a world where yield is tough to come by. Our thesis is that by partnering with solid underwriters and using our macro knowledge of business cycles and markets, we will win for our investors over the long haul. We won’t get to trumpet about our trading on TV every day, but we are fine with that. We will maintain our investment discipline based on the framework discussed above, providing strong, slow and steady returns — like an elephant. How many blue ones have you ever seen? At least there is an answer for that question.