ECONOMIC COMMENTARY

CIO Update: Investing in 2021 – what are you actually buying?

Tools and technology have increased access to information and investing opportunities. Shannon Saccocia, Chief Investment Officer, provides three considerations before you dive into today’s hottest parts of the market.


Audio transcription

Hello, and welcome to Boston Private Perspectives. I'm Shannon Saccocia, Chief Investment Officer of Boston Private, and I want to thank you first for joining us.

As I thought about what I wanted to talk about today, I was reminded of a conversation I had a few weeks back with several institutional investors around the topic of a very prominent hedge fund manager's recent SPAC, and the outcry from investors in the SPAC when he had the nerve to buy a media company spin-off rather than something cooler like they had anticipated.

I've been thinking a lot about that conversation since then, and many others I've had over the course of the first half of this year. SPACs, short squeezes, crypto, for every conversation I've had about inflation or jobs or stock market valuations, I've had at least two about these "new areas" of the market.

So I've been thinking about what the questions really should be for investors when entering into new territory in their portfolio. And I think they can be summarized by these three things: What are you buying? Why are you buying it? And how long do you want to hold if for?

The second of these, on the face, is the easiest to answer. Investors buy things to make money on them. That's the driving force of both long-term investing as well as speculation. We, as humans, are looking for the upside of all scenarios, and it's difficult at times when it seems like there is easy money to be made to move away from that easy money and try to find things that perhaps are harder.

In addition, several of these areas, such as some of the stocks that had been caught up in the Reddit Wallstreetbets, short squeeze mania, and, you know, frankly, crypto as well have experienced significant gains over the course of the last six to nine months, which have made them very attractive for those that, perhaps, are looking for something above and beyond what are expected to be rather muted returns over the next several years in traditional stocks and bonds. So again, buying things to make money on them, that's why you're buying it.

The important thing, though, is that you need to think about how long you want to hold it for, because that does play into how much money you will make and the protentional for you to make a bad decision, and not necessarily deliver the gains to your portfolio that you would otherwise. Investing, historically, wasn't identified with a lifestyle decision or a personality trait, except many for junk bond traders, which are, you know, the stuff of movies.

Today, however, this holding period for stocks, this holding period for cryptocurrency, this holding period for digital assets in general, it is all tied up in what feels at times to be a mania. And instead of taking a more, I guess you could call it pedestrian approach to thinking about the gains that you have earned in a particular investment, or right-sizing it as a part of your portfolio, it's seen as a positive to hold onto these assets for an extended period of time as an expression of your conviction in these new parts of the market.

The challenge with this is that for every person that's holding a particular investment, let's take a SPAC, for instance, there are a lot of institutional investors who are in early into SPACs and they actually get out of them either just prior to the deal being announced for the acquisition of the asset that goes into a SPAC or perhaps, even earlier than that, after there has been significant additional interests, whether from other institutions or smaller institutions or retail investors into that SPAC, they lock in those gains well before that SPAC is being publicly traded and a broader set of investors, it has the opportunity to really look at that.

And so that holding period is critical to garnering the highest level of possible gains for these institutional investors. And so it's not necessarily that there's anything wrong with something, you now, being held for the long term. I mean, I have stocks in my portfolio that I've had for, you know, a decade. They're still good companies. And so, therefore, it makes sense for me to continue to hold them in my portfolio, but it doesn't mean that I'm holding them because selling them would indicate that I have lower conviction or that I have lost my edge or that I am not making good decisions in the first place.

Portfolio construction is a crucial piece of what institutional investors do over time. Sizing and right-sizing and re-sizing positions when they've appreciated, potentially, when they've gone down, you can add to them, if you feel like your investment thesis is still intact. And so again, this view that in some way selling a security, either after it's appreciated or even after it's gone down, if the thesis has changed, is a show of weakness. It's certainly something that appears to be more prevalent over the course of the last several months than it was historically.

And so I think that when you're investing in anything, it's really important to understand what is the time horizon over which you expect to hold the investment. What are the metrics, what are the guideposts that will force you to re-evaluate whether you should still hold that investment, and how are you gonna manage if there are sharp increases or decreases in the value of that investment?

In the moment, it's hard to make a good decision. So providing some structure and thinking about it in terms of the overall portfolio, setting those parameters upfront can certainly help to navigate, even though most volatile of stocks. Like we've seen over the last couple of weeks. We've seen several stocks that have moved, you know, 15%, 20%, 30%, 40% in a given day. Now, that's challenging to manage, but provided that you've set these parameters for the length of time and, you know, the potential gain in that investment, or the loss that you're willing to sustain in that investment, and if it falls beyond those parameters, it forces you into action, well, then the time horizon is appropriate for you.

But defining that time horizon is incredibly important because it allows you to become less emotional, and, you know, that's why we set time horizons the way we do, for the things that we buy in our portfolios, for the way that we structure our portfolios. We're thinking about it from a long-term perspective, and therefore, we're less likely to react to these small short-term moves, or large short-term moves, in some cases, because we have that long-term viewpoint.

So you know that why you're buying it is to make money. And you know that it's important to set your holding period for that or, you know, the time-period over which you were going to gauge whether that investment was successful or unsuccessful. So it actually leads me back to the first question, what are you buying? And I've ordered the three questions this way because I think that this is the level of priority that many investors are applying to their decision-making this year. And it makes sense. We're in this period of incredibly easy monetary policy. We've experienced significant fiscal stimulus. The savings rate, overall, in the United States, has grown exponentially over the last year. So it just feels like there's additional money, liquidity in the market. That, you know, certainly seems to have allowed for greater speculation in different areas of the market.

But it's important that whether you're looking at something like Bitcoin or you're looking at Proctor & Gamble stock or perhaps you're looking at some of the SPACs that have been listed over the last, you know, year or so that you could potentially have significant upside should they invest in a company that represents a really great opportunity to go public, understanding exactly what you're buying is really important.

Last week, there was a flurry of interest in Wendy's stock, for instance. And it was surmised that this was, you know, yet another example of some of the widely shorted stocks that have been short-squeezed and produced significant gains for investors over the course of the last, you know, six months or so, namely, the biggest two have been GameStop and AMC. The issue was is that there wasn't a lot of short interest in Wendy's. So the thesis and this narrative around how these trades have been successful, in that there is significant short covering as the prices have increased, the thesis didn't bear out. And there's a flurry of activity and then suddenly, the stocks hold off again because essentially that narrative was inconsistent with, you know, what has been successful over the last few months.

But again, if you're just looking at the face of that and you're not doing that, sort of, even just first level of fundamental research of what is that I'm buying, it's very easy to get caught up in this enthusiasm for some of these, you know, potential big wins.

At the heart of all of this, there's a difference between speculation and investment. And it's not necessarily a negative that there's become this increased engagement of investors over the course of the last, you know, year or so, really beginning sort of midyear of last year coming out of the pandemic in investing, learning more about the markets, getting engaged in the markets and utilizing the bevy of tools that allow for much wider and broader participation, particularly in the equity market, certainly than 5 years ago, definitely than 10 or 15 years ago.

But it does go back to understanding, you know, what you own, and why you own it. That famous hedge fund manager bought what he felt was a good investment with the proceeds raised in his SPACs. And it's important to remember that the markets don't owe anyone anything. And despite the best efforts of regulatory authorities, there are still bad actors out there. But Bill Ackman isn't one of them. The investors who were upset about his decision took a chance on a big payday and wanted to see something exciting on the other end of that check. Maybe it will be a home run, and maybe it won't. But with every investment comes risk, and taking the time to understand what those risks are, and perhaps choosing to avoid those risks altogether is just as important as seeking opportunities to make money.

So there may be things that we're not going to incorporate into portfolios for our clients because they don't meet those characteristics of what we feel is appropriate for us to be investing in. But this idea of understanding what you're buying, why you're buying it, and how long do you want to hold it for, with the emphasis really being on that first question, what are you buying. Setting parameters around the next two things, why are you buying and what is the predetermined successful outcome, and how long do you want to hold it for, meaning, how long are you going to wait to see if that outcome actually occurs, if you stick to that, I'm not saying that you won't make mistakes or missteps because everyone does in investing, but it should create a better experience as an investor and importantly, a foundation upon which you can grow and learn in your investment decision-making.

Thanks again for listening to this week's podcast. I want to encourage all of you to reach out to our team here at Boston Private with any questions or concerns you may have. If you have specific questions or thoughts on my points today, you can find me on Twitter, @ShannonSaccocia. You can also read our latest perspectives on the markets, the economy taxes, estate planning, and the second half of this year by visiting www.svb.com/private-bank. If you want all of this information delivered right to your inbox, I encourage you to sign up for our newsletters while you're there. Be sure to subscribe to the "Boston Private Perspectives" on Apple Podcasts or wherever you prefer to listen. And once again, I want to thank you for joining me.

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