Careful Stock Selection is the Best Treatment in Today’s Marke – YouTube Video & Transcript

In this video, David discusses how during these very difficult markets, you need to carefully select the stocks you own and stick to the very best to help you navigate the current Covid 19 crisis.

David Gallacher, CFA – Careful Stock Selection is the Best Treatment in Today’s Market

Video Transcript

David Gallacher, CFA:

Hi everyone. Well, it’s been a while since I posted a video and thankfully my colleagues have also been hosting so please check out their work on our website Insights. I’m here at home on Long Island with my family. We’re all safe and well, thankfully. I hope you are too. As far as work goes, this is my office. I come into this room every day and get on with the business of managing portfolios, so as always I’m available to talk anytime. I encourage your questions, ideas. Please check out our website for our contact information if you’d like to speak any of us, your call is more than welcome. Obviously, we’re still in a, generally, we’re still in a lockdown to a greater or lesser degree wherever you may be watching from. I don’t plan to cover specific news on the coronavirus.

David Gallacher, CFA:

I wanted to take the opportunity to discuss diversification in the current context. Some of the points I’ve discussed in previous videos, but it’s very important for today’s investing world. One of the features of the market over the past few months has been the enormous disparity in the fortunes of corporate America. Now if you’re an airline, a hotel, a restaurant, a specialty retailer, bank, you know the current crisis has hit you harder than perhaps any other possible scenario. And risk modeling for viruses such as we’ve experienced is going to be a big, big, big business in the future. On the flip side there’s a number of industries and companies that have managed far better in the crisis, technology companies, big-box retail, utilities, parts of the media, they’ve been just fine and the rule has been basically that you have to follow the revenue.

David Gallacher, CFA:

So it doesn’t really matter how good your business is or how well it’s managed or how good your products are if your revenue disappears overnight, if the force is completely outside of your control, then your business is in big trouble. We have tremendous bifurcation in markets where companies that have revenues through this crisis have been great and those most impacted have been terrible. Now all of their screams for selection when managing your investments and buying the market is just not an option for me here. Why buy industries or stocks that you have no revenues, you have no idea when those revenues will return and when they do return, it’s going to be spotty. It’s not going to just be a light switch when we all get back to work. If you’re buying custom investments based on indexes, you’re basically volunteering to buy dozens, maybe hundreds of stocks that you know today aren’t making any money and sure many are going to come back stronger than ever.

David Gallacher, CFA:

We know that story, but some won’t and so it’s a little bit reckless, I think, when you’re investing to just buy this thing called the market, you really, really have to be more selective than you’ve ever been. The other consideration is to keep a lid on a number of stocks that you’re invested in. Now, mathematically you simply don’t need hundreds of investments to achieve diversification. You can do it with dozens. At a certain point adding more stocks does not achieve any incremental diversification benefit and each marginal investment that you search for is a little less attractive than the great one you found before. You start with your very best ideas and then after that all the other ideas are only second best and you really don’t want a portfolio that is just full of second best. The concept of diversification is to carefully construct a portfolio of investments that have attributes that offset each other.

David Gallacher, CFA:

Different correlations, inverse correlations to be technical, but that’s not a consideration when constructing an index. Basically, when you put an index together you’re simply taking broad characteristics such as size, country, industry and putting them together in a basket. There is zero work done to assess the true diversification benefits of that basket. You’re just trying to get security in numbers that’s really all you’re doing by investing in an index. And I would argue that you don’t have true diversification in the next product. You just have a cross-section of a particular criteria or a collection of criteria. They may all be terrible, they may all be great, but you know, assessing the risks such as COVID-19 for example. The best results are achieved through sensible qualitative assessment. For example in this scenario will my company have any revenue in the scenario that a virus hits all of a sudden. You can’t do that based on pure quantitative modeling.

David Gallacher, CFA:

Obviously, quantitative modeling as we found out in the last few months is very difficult to predict and can sometimes be very inaccurate. So markets have staged a remarkable rally over the past few weeks and now is really a good opportunity to reassess your investments and ensure you’ve got the right names, not the most names. Most portfolios have holes in them. Once you’ve tested and steeled your nerves in the current market the next step now is really to look at your portfolio and assess its strengths and weaknesses. If your investments are free-falling more than the overall market and depending on the circumstances you’re likely overexposed either to the market as a whole or to a certain industry or country or style of investment. And that’s most at risk.

David Gallacher, CFA:

So you need to address that. The best stocks always recover the worst don’t. Have a list of the companies that you want to own. So your ideal portfolio, your dreamworld portfolio, and then get to work transitioning what you already own into what you want to own, but have a steady hand. Don’t lurch. from one investment to the other. There’s no easy answer and the market turbulence is very, very troubling, but always be moving towards that ideal portfolio.

David Gallacher, CFA:

Now I’ll leave it there for today. I’m going to post some more videos in the coming weeks. Please contact me if you’d like to speak to me about your investments or if you do have questions. I want you to get through this so you know we can have a much better time of it and then we’ll enjoy ourselves when the good times come in the next few months, hopefully. That’s all from me. I’ll see you next time. Thanks for watching. Bye.

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