Investing rationally, not emotionally, doesn't make you a 'perma bear'

I must say it gets a little tiring to always be labelled a “perma bear.” There is no room for “perma anything” in this business because nothing is permanent. Change is constant. But the fact of the matter is that I am, to a tee, patient, disciplined and always invest rationally instead of emotionally.

I have two philosophies: first, never put all your eggs into one basket; second, there is never a sure thing. Respect the probabilities of all outcomes, set your markers as to when it is time to shift the view (and asset mix), and focus on risk-adjusted returns, not gross returns on their own. Luck is no match for diligence.

If there is such a thing as a perma bear, they would be recommending a complete shift to canned tuna, baked beans, barbed wire and sawed-off shotguns. I don’t ever recall making such a recommendation.

Most of all, I preach diversification — both geographically and across the capital structure. But I assume that in today’s myopic market with shortened time horizons, preaching diversification and not telling people to go all in on the S&P 500 renders you a perma bear. Crazy stuff, but it is what it is.

Let me tell you about my experience over the past year, as I have just received my family’s complete asset mix. The aggregate portfolio is up 11 per cent in total return terms over the past 12 months. My asset mix is 20 per cent equities, 25 per cent alternatives (long-short strategies, some private equity and precious metals), 25 per cent in cash/equivalents and 30 per cent in bonds.

Yes, yes, this has underperformed the S&P 500, but this is a diversified portfolio with a far superior Sharpe Ratio, which means the “risk-adjusted” return was right in line — minimal drawdowns and very low volatility. So, the reason I am not upset or frustrated one iota by not matching the S&P 500 is because I have an asset mix that lets me sleep comfortably at night (okay, 10 milligrams of Melatonin doesn’t hurt either).

My advice is to ignore market and macro pundits and ensure that your portfolio, like mine, captures at least a chunk of the upside while not participating in the downside. All markets move in cycles, but not simultaneously, which is why diversification (as I like to say) is not some dirty 15-letter word.

When the eventual bear market in U.S. stocks comes (and while it is always tricky to time, it is inevitable), your clients will end up blessing you if you have a well-balanced mix with uncorrelated assets.

Common sense sometimes means you miss some, or a lot, of the upside in a market bubble, but the investing game is (or should be) a marathon, not a race. Don’t be in a position, due to a lack of rebalancing and undue concentration, of having to spend much of the next bull market crawling out of the deep hole caused by not being adequately positioned for the coming bear market.

If you still think I’m some sort of radical perma bear, my response is that I’m never bereft of ideas on the long side.