What tiny bubbles teach about investing through tough times
By Alexander Jones, CFA 21 December 2020 3 min read
Written by Alexander Jones, CFA, and co-authored by Daniel Spencer, CFA on behalf of Private Investment Counsel, who believe in a holistic investment counselling approach to helping high net worth clients.
2020 has been an unconventional year marked by plenty of uncertainty and emotion—both in everyday life and in the financial markets. Given the extremes, the New Year and the hopes of a fresh start can’t come soon enough. With the holidays just around the corner, we hope that our clients will be able to take time to slow down and spend it with their loved ones. This may involve enjoying a well-deserved glass of wine or maybe even popping a bottle of Champagne in celebration and acknowledgement of making it through a difficult year.
While savouring a glass of bubbly, you may wonder why some bottles of Champagne are considered extraordinary, and how some vitners seem to be able to produce high quality bottles more consistently than others.
The production of Champagne is as much of an art as it is science, with both luck and skill playing important roles. What sets a high quality producer apart is their mastery over the elements that are in their direct control, such as vine cultivation, timing of the harvest, fermentation, and bottling. A positive outcome from these elements is attributed to a winemaker’s skill and process which have been refined over decades. That being said, there will always be uncontrollable variables such as poor weather that can undermine the work of even the most skilled producer and can affect whether a Champagne turns out excellent, average or poor. However, having a consistent approach over the controllable, gives a producer a much greater chance at success.
The parallels between making quality Champagne and successful investment outcomes, are that many variables exist for both that we cannot control. Yet a sound process and attention to detail can help a winemaker or portfolio manager consistently deliver on their objectives so that clients may achieve their unique goals.
As much as they wish they could, winemakers can't control the weather any more than portfolio managers can control the markets. That said, experts and clients can maximize their odds of success. Not every grape will be selected for fermentation just like not every stock or bond will make its way into your portfolio. Moreover, portfolios are deliberately structured and diversified to reduce risks which is critical to successful investment outcomes. This same attention and care is taken by many top winemakers who select multiple grapes from multiple vineyards and multiple vines.
For winemakers, care is taken when hand picking and selecting the best grapes. For portfolio managers, studying a company’s financials and searching for strong management teams can consistently create value for shareholders.
In the ancient times, winemaking was something not well understood—fermentation just occurred naturally and all were happy. In time, people learned how to control the process (inoculation and bacterial strain selection, refrigeration, oak or stainless steel casks, etc.) to improve the final product. Just as in the early days of investing, markets were not transparent or liquid and paying a broker commission was the only way to gain access.
Today, sophisticated and low-cost investing options are available to all investors, facilitated through mutual funds and exchange traded funds (ETFs). With these options, portfolio theory and risk and return implications are well understood, while the use of alternative investments and non-traditional assets can enhance returns and reduce portfolio volatility. What this implies, is that portfolios today can provide higher returns per unit of risk than could be achieved before.
Dealing with uncertainty is part of the job, both in investing and winemaking. Skill, resiliency, and a deliberate process enable winemakers and investment managers with the greatest chance to consistently provide a quality experience to their clients.
2020 has been a year of extremes and we know markets tested the fortitude of even our most patient clients. As always, we will continue to do our best to manage your wealth by sticking with our prudent, time-tested, and disciplined process. With that said, we are grateful for the opportunity to continually earn your trust and wish you the very best this holiday season.
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