Letter from Felix
Hop to it: Investing lessons in the Year of the Rabbit
Investors, are you ready for a regime change? On January 22nd, the first day of the Chinese lunar year, we bade adieu to the ferocious Tiger who passed the baton to this year’s mascot: the humble Rabbit.
True to form, last year was marked by extreme volatility and general turbulence. Just about everywhere you looked—stock, bond, and real estate markets, geopolitics, quick tempers, and bad hair days— you name it, troubles abounded. What can investors glean about the coming year from the Rabbit, a mild-mannered, long-eared, vegan?
Rabbits represent the spring season, and new beginnings, so let’s begin at the beginning with a tale.
A rabbit, a fox, and a monkey meet the Man in the Moon who has come down to Earth in the disguise of a beggar. Each animal offers the hungry beggar some food: the fox brings a fish from a nearby stream, the monkey gives him a piece of fruit from a tree, but the rabbit has nothing to give so he throws himself on the fire the man made for cooking. Deeply moved by the rabbit’s kindness, the man spares the rabbit and draws a likeness of the rabbit on the face of the Moon to remind people of charity.
Last year, investors’ animal spirits were stirred and shaken. Perhaps 2023 will be a good opportunity to absorb the lessons learned? Investors could do worse than spend some time chewing on what it means when the bonds, the ballast of most balanced portfolios fail so spectacularly, when both punters and pension funds fall headlong under the sway of the “shiny new thing”, e.g. crypto, and when TikTok becomes the source for investing advice.
The decade-long, exceptionally accommodative monetary policies, where markets were coddled and the flames of speculative activity were fanned by near-zero borrowing rates, are in the rear-view mirror. In my humble opinion, I suggest investors take a page from the Rabbit’s playbook and nibble on these tried-and-true strategies in 2023.
The Chinese saying, “a crafty rabbit has three burrows” means it pays to create optionality in our investments. While not as flashy as the Tiger, the Rabbit is quiet and confident, quick and clever—he’s got a Plan A, B, and C. In a world of increasing uncertainty, being properly diversified is more important than ever. But what does true diversification mean today? Setting an allocation to non-correlated assets such as liquid alternatives and certain hedging strategies, could be prudent, especially when asset classes such as stocks and bonds move in unison as they did for the better part of 2022.
Stay calm and balanced
Rabbits appear to be mild mannered and emotionally steady. I’ve never seen one lose their temper. I believe practicing equanimity is Rule No. 1 for investors, too.
Buffett says, Rule No. 1 is “never lose money” but even the great investor himself has lost plenty over his long investing career but he’s never lost his equanimity.
One way to help keep a balanced mind during the inevitable periods of market price volatility is to have a balanced portfolio and enough liquidity (e.g. cash or cash-like instruments) to take advantage of opportunities when they arise.
Today, there are many unknowns on the horizon, and this will require investors to be agile in their strategies. For example, will central banks continue to rein in inflation without toppling us into a recession? If there is a recession, will it be shallow or deep, short or long? Will the TMT sectors (technology/media/telecommunications), which took it on the chin in 2022, regain their place in the sun?
As Bette Davis said in All About Eve, “Fasten your seat belt. It’s going to be a bumpy night.”
Hence, for the average investor, this year it may be prudent to aim, not for shooting out the lights, but for a nimble and balanced investment portfolio that provides a mixture of some growth, some capital protection, some income, and some non-correlated returns. It’s not too hot (too risky) or too cold (negative real return) but just right. Very rabbity, I’d say.
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