While we are looking forward to the resumption of the NHL season if it’s done in a safe way, the suspension of the NHL in March meant finding a way to satisfy my 7-year old son’s insatiable appetite for hockey, and we’ve taken to watching vintage hockey games. Aside from watching the 1993 Stanley Cup playoffs (in order to ensure allegiance to the right team), I’ve been trying to satisfy his curiosity about the players he has read about or heard about from me. What better place to start than with the high flying 80’s Oilers and none other than Wayne Gretzky.

No lead was safe against the Oilers back then as they could put up goals in buckets. Offense was the driving force for the team and five Stanley Cups in seven years was the result. Games were fast and exciting. But then things changed and one person above all was held responsible. Jacques Lemaire. Preaching a defense-first mindset and perfecting the neutral zone trap led to a 1995 Stanley Cup win for the New Jersey Devils….and a lot of disenfranchised hockey fans who didn’t like falling asleep in the stands for the price of an NHL ticket.

Which begs the question, does offense or defense win championships? This question is as important to the world of investing today. We have gyrated rapidly between fear and greed driving the market. When fear is dominating the headlines and markets sell off, defensive strategies are appealing as they potentially stand up better. When greed drives the headlines, more aggressive strategies re-emerge.

But like winning the Stanley Cup, investing requires balance to achieve your goals. Our goal of long-term capital appreciation requires both capital preservation (defense) and growth (offense). The focus of our investment team is on finding this balance. Traditionally when fear picks up, it is usually time to move more onto the offense. When greed dominates it’s time to focus more on defense. This environment is different.

During an economic shutdown, such as the one we just experienced, balance is meaningless if you don’t survive. Stress testing the businesses you are invested in for a prolonged shutdown is critical to protecting on the downside. In late Q1 and early Q2 lots of businesses saw their stock prices crater. Some companies have recovered all of their losses, but the majority have not. We all hope that the world returns to a new semblance of normal sooner rather than later. As we like to say however, hope is not an investment strategy. This exact same hope increases the probability of a second wave of COVID-19, akin to the second wave of Spanish flu seen in the fall of 1918, coming to bear. 

No one wants to watch a Jacque Lemaire coached hockey team (unless it’s your team hoisting the Stanley Cup). While defense is effective and needs to be a priority at times like this, the reality is, more people would like to watch the 80’s Oilers (except maybe those who live in Calgary). Offence (greed) is eternally more exciting, however, since being in lockdown and working remotely, all of our attention has been focussed on finding the balance between defense and offense in our portfolios. A Lemaire-coached, Gretzky-led team, if you will. This changes every day with the dynamics of security prices and our increased knowledge and understanding of the potential outcomes from the COVID-19 pandemic.

David Barr, CFA
July 29, 2020