Actively Manage Your Investments, Avoid A Horror Show – by David Gallacher – YouTube Video & Transcript

In this video, David Gallacher, CFA discusses the importance of actively managing your investments, particularly in this age of such uncertainty.

Video Transcript

David Gallacher:

Hi everybody, Dave Gallacher here. Well, 2020 has been one of the scariest, but also one of the most remarkable years in financial markets, at least so far. In my 20 plus year career, I’ve seen obviously the financial crisis years, I’ve seen the dot com, I’ve seen 9/11, the subsequent recessions from there, other events. And 2020 and the events surrounding COVID and other things is going to go down in one of the more memorable, if not for all the right reasons, but certainly it’s a year that is going to be documented in history. Remarkably, despite all of the intense volatility that we’ve seen, particularly in March and April, markets are trending towards flat. Some are even a little bit positive on the year. We here at CJ Lawrence, in fact, we’re well ahead of indexes, major indexes. And in fact, we’re having our best relative year, I think, on record.

David Gallacher:

So that is something that’s very welcomed, but also we very much recognize that while COVID remains front and center investing is going to remain a very treacherous sport. And so we’re on, what I call a continuous Amber Alert, here watching every day and trying to do the very best we can on behalf of our clients. Interest rates, the challenges that we face, one of them is interest rates back to zero that makes investing at the lower end of the spectrum very, very difficult to get any kind of positive return at all. So imbalanced accounts, not only do we have to work through what’s happening with volatility in equity markets, but we also have to deal with very meager returns in fixed income bond markets and other similar low risk instruments.

David Gallacher:

So again, we’re going to get up every day and do the very best we can with what is available in markets and we will work through this and will thrive on the other side. I’ve been working almost exclusively from home now since March, which is five months, which is quite unbelievable, have had no issues. Actually, I’ve had one issue. I had an issue last week where a storm, a pretty powerful storm, blew up through here and knocked out power in most of western Long Island to be honest. We were pretty lucky, we were only out for a day or two, but some of us in the office were without power for three or four days. So it took us all a little bit by surprise, but we’re all back on track now. And so far, at least in the last five months, apart from last week’s little drama, everything has worked very, very well.We’re very, very thankful that we can work from home and continue to provide our services seamlessly. And I think, in today’s world, technology has afforded so many the ability to work at home seamlessly. And I think that’s a major reason why the U.S. economy and other economies, despite obviously significant challenges, have held in here. And I think many more people than had previously been able to have been able to continue to work at home and keep things going. That’s been a very good thing. I would encourage you, normally I’ll leave this to the end of the year, but I would encourage you please if you’ve got concerns, which I think everybody has, but if you would like to speak to me, please don’t hesitate to give me a call. I’d be more than happy to hear your input.

David Gallacher:

Your input together with our input is really what helps us to form a really good picture. And I think in a world at the moment, especially where most of us are at home, finding out what your experiences are, whether it be at the other side of the country or elsewhere is really actually very valuable to us at the moment, because I don’t get to see the rest of the country and the rest of the world, like I used to and normally do. And so everybody’s feedback is really very valuable, so please call, email, ask questions, if you’d like to set up an appointment to talk, I’d be happy to do so.
So today I’ll talk a little bit again about active management. I’ve talked about this before and nothing really has underlined the importance of taking an active role in your investments than 2020 has. It’s a huge disservice to investors to just suggest that passive management, or do nothing, or no management, I think which is an alternative to passive management. I don’t think in any way is that a longterm solution to anybody’s investment needs. I get that fees are a major consideration to all of us, but the simple truth is that there’s been major fee compression across this industry for years and so the cost of quality active management has declined. We price our accounts very competitively because we understand that ultimately it’s the net return to investors that counts. And if we charge too high a fee, well, then that fee is just going to erode our performance and encourage our clients to look elsewhere.

David Gallacher:

So investment managers need to price their services competitively. And I think in many instances, when you look at the total expense ratio, and by that we mean all of the costs combined, whether it be the advisor fees, whether it be third party fees, those fees from mutual funds, ETFs, whether it be commissions, 12b-1 fees, marketing fees. I think active management, the compression, I think, in fees that we’ve seen over the years means that the price that you pay for quality active management is not actually that far away these days from the price that you may pay from our advisor based more passive investment management solutions. So there’s really no excuse to explore both options. And I think, as I say, 2020, you really need to have your assets, either yourself or somebody else manage those assets actively. The other issue I think that people have had concerns with, with active management is performance. And I get that many active managers over time have under performed or the performance at best has been underwhelming, but that’s not a reason in itself not to try and add value to your investment decisions. I believe a lot of the poor performance that we see in this industry is the obsession with tracking indexes, and don’t forget the indexes are subjectively constructed baskets of stocks or portfolios, right? Even the S&P 500 is an index that’s designed on a subjectively created set of parameters, and I think the main one being market capitalization. So this obsession with tracking indexes, I think has again, led to a disservice to investors in terms of performance. Obviously when you look at markets in times like March, tracking an index 30% lower is not really going to help anybody. Even if you do outperform by a couple of hundred basis points, it’s not going to really help you get to where you need to go.

David Gallacher:

So I think there’s too much focus on indexing and I think it’s possibly pulling investors away from what their ultimate goals are and the best way to get there. And by active investing, I’m not talking about trading or trying to time the market, active management to me is working with the investors to determine their appropriate risk, appropriate attitude to risk and return, everybody is different. Some people are risk seekers, some people are more risk averse. And also, we need to look at your means of investing, some people can afford to take on much greater risks, some people can’t afford to take on too much risk. We need to scrutinize all of that, all of those inputs, your personal characteristics, your preferences, certain restrictions, every single client is different, they really are.

David Gallacher:

We need to scrutinize our client dynamics and then combine that with all of the information that’s available to us in financial markets to build, and construct, and manage a portfolio that we think is most suited to get you towards your goals, get you where you need to be. And assessing future expectations and aligning those future expectations from a market standpoint, with your needs from a long term investment standard. So create a portfolio, actively create a portfolio, that really is best equipped and primed as best as possible for whatever the world is going to throw at you. And obviously 2020, nobody expected what happened to happen. It wasn’t built into anybody’s models I guarantee you on January 1st of this year. So you need a dynamic strategy, a dynamic advisor that’s going to be able to inform you either through words, or their actions, or hopefully a combination of both, and make sure that you’re in the best possible position possible each day to weather whatever the world is going to be throwing at you, and you really need to be ready and willing to take necessary action.

David Gallacher:

One of the other major reasons to pay for active management is access to quality information and information in financial markets is expensive and you genuinely get what you pay for. It also takes a tremendous amount of time, training, and experience to understand just the unlimited variables that are out there, and if you’re not looking at that information, and the data, and looking at your companies, and looking at what the macro environment is, well, then you’re just relying on guesswork. I don’t really want to invest in guesswork. It takes… I can’t watch a TV show without reading 10 reviews. I can’t buy anything on Amazon without reading a dozen reviews. So I want to scrutinize very carefully what I want to invest my money into. I don’t like scary movies, and so I’ll avoid horror. And I think that the same can be said for investment management, if you’re risk averse then you need to avoid those investments that are going to expose you to too much risk.

David Gallacher:

The main feature of global stock markets over the past five or six months is just the absolute enormous disparity in returns between what’s working and what’s not. The obvious one is think, technology versus energy, or online retail versus traditional bricks and mortar retail. Other areas, think about the difficulties that banks are having versus digital payment stocks, those types of things, enormous disparity. And this market genuinely has been about following the revenue, those companies… It’s not difficult to figure out what companies are doing well, where you’re spending your money or continue to spend your money, and what companies and industries, airlines, hotels, they’re obvious ones, industries that aren’t doing very well in this environment, and through no fault of their own, but we’re not in the business of trying to time or predict when COVID will end or who’s going to win the upcoming election or future elections.
We are focused very much on the companies that we’re invested in, making sure that they can continue to deliver revenue, continue to drive that revenue to the bottom line, ensure that they’ve got strong balance sheets so they can weather these unpredictable and unexpected storms that we’ve seen and will continue to see into the future. We’re not trying to… We’re not trying to do turnarounds here. We’re not trying to buy cheap stocks in the hope that one day the market will turn around and recognize them. It’s follow the revenue, follow those stocks that have held in there the strongest, those stocks that have held in and performed the strongest in the past six months, the likelihood is they’re going to be the stocks that can continue to push through and perform the best in the next six months and beyond as well.

David Gallacher:

So when I look around, I can see clearly what companies are doing badly, and what companies are doing okay, and what companies are thriving. And as I say, the alternative is a horror show and we just simply don’t want to invest in that. So please active management, whether you want to do that yourself, we’d advise you obviously to hire a professional to help you, but really stay on top of your investments, stay focused on those companies and those investments that continue and you expect to continue to do well in this environment. That’s all for today. Again, please call me if you’ve got any questions, tel:212-888-3841. If you’d like to talk or you’re stir-crazy at home and you need somebody just to run some investment ideas through, please contact me, mailto:dgallacher@cjlawrence.com. I am at home literally all of the time at the moment as probably most of you are, so I am available. Reach out, I’ll be glad to hear from you. Thanks very much. Bye.

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