2020- 2021 – Lessons and opportunities

The best way to kick off a year is to first take stock of the preceding year and to highlight some learning which can then be integrated into your strategy for the year ahead. Naturally, strategies need to be dynamic and be able to adapt to changing conditions.

For example, at the start of 2020, no one knew the extent of what was coming. This is always why I like to view my strategy along the lines of how I can mitigate my risks first. I use this to determine my risk ‘budget’ per se. Thereafter, I look at how I can allocate this risk budget to try and maximize my returns. Everyone’s financial situation is different which is why I don’t give any advice in these posts. I prefer to share how I approach my own investments and if there are some learnings which can work for you, well and good.

Also, a lot of the macro stuff I think about tend to be abstractions which need to be ‘distilled’ into actionable investment ideas. It is easy to feel like a hero after making money in 2020, especially if you caught the run in stocks like Tesla, or in Bitcoin. The thing is it isn’t always easy and a portfolio approach to long term wealth creation and preservation requires more than just a few ‘punts’. None of us are infallible. We make mistakes and anyone who suggests otherwise is likely a hack or charlatan, so always be vigilant and be aware!

Lessons from 2020

2020 for me was a year with some wins and losses too. In aggregate, I think I did ok. The March selloff scared me a little and made me realize that I wasn’t as active in managing my ‘risk budget’ as I should have been. After the bounce, I took some money off the table and in hindsight, probably de-risked too soon. That said, it wasn’t the wrong decision for me. I wanted the buffer and that came at a ‘cost’ of not having as large an exposure to the equity market as before.

I view my own strategy as a combination of assets. Its not all about equities. I look at FX, physical assets, gold, and crypto and consider the role that each part plays in my portfolio. For more on my asset allocation, see this piece written back in November.

From a psychology perspective, it is also important to not anchor to previous trades and/or lost opportunities. Every day, we get new data, new perspectives which need to be fed into one’s long term plan. Managing a portfolio is like tending a large garden. Some plants will flourish, others wont. When something doesn’t work, look at whether your investment thesis was sound and if so, stay the course. If not, if new information changes the thesis, we should be prepared to adjust and prune as required.
Framing my thought process from 2020, these are some of my top 3 lessons from 2020:

1. People and societies are resilient and will adapt. We should value people first. Sometimes hope wins, but hope is not a strategy. We need unified purpose and clear goals if we are to get ahead.
2. Tipping points are all too obvious in hindsight but often the seeds for a major structural shift in how we do things are sown years before. Have a long-term mindset and strategy and stick to the plan.
3. Resilience is not built at the time of crisis. Resilience is built in the good times. Often it is counterintuitive and exceptionally difficult to go against the grain. Like in the ‘Joseph’ principle, one must always learn to set aside for the rainy day which will inevitably arise.

  
Looking ahead to 2021:

I would like to look through the noise and use 2021 as a steppingstone to greater megatrends and structural shifts underway.

1. Climate change is REAL! The volatility of global weather patterns is symptomatic. We need to take charge and spearhead clean energy initiatives and energy storage technologies. Electric cars are just the tip of an iceberg here. There’s a lot going on that will fundamentally change how the world works. Clean energy and clean tech is the future and will gain even more momentum. See my previous posts on sustainable investing and podcast in the links.
2. I see the convergence of technological and industrial platforms. Think of how electric cars will evolve to self driving cars which will themselves evolve into app driven smartphones on wheels? Maybe beyond 2021, but we are underway.
3. A greater adoption of technology in our lives as the Internet of Things becomes ever more real. One of the key competitive advantages a play like Tesla has is the size of its network which will feed ever increasing data into its machine learning program to ensure that the use experience gets better and better! Not just Tesla but as Big data trends continue, Algos and AI will become increasingly adept at analyzing our lives and shepherding our behaviors. If managed correctly, this could go a long way in better informing public policy and curating our interests, but beware of ‘groupthink’ (Orwellian reference here).
4. Digital environments and gamification will continue to be key features of the world we live in. In line with the Big data trend indicated above, increasingly millennials are driving a move to existing more fully in an online world. I’m old enough to remember ‘Second Life’ from Linden Labs which was a digital world created where people could ‘live’, transact and more. They even had their own currency called the Linden Dollar. Throw forward to today and digital worlds are prolific. Look at Roblox for kids where you can buy Robux or Fortnite which developed an online economy for tools needed in the game, costumes and more. Its fascinating. Digital assets are real and digital currencies are even more so. Robin Hood has gathered momentum by ‘gamifying’ trading. We can argue whether this is good for society or not but the fact is that the trend is here. And it needs more data servers, more network connectivity and this means real world investment. ‘Enter the Matrix’.
5. Healthcare. I would be remiss to not mention that 2020 showed us that we are vulnerable as a species. Healthcare will remain front and center as well especially in a time when COVID infections are still rising and vaccinations are rolling out but still at a glacial pace. Vaccine providers, remote medicine and services/apps designed to assist us in living better will remain a trend. Amazon entering the Pharma distribution business is another sign that there still remains a lot of action here.

The megatrends above are largely feeding into my world view and commensurately into my investment strategy. I would look to diversify across several sectors and stocks in my equity allocation. I will get this mostly be reallocating from existing positions or allocating current ‘risk’ capital to new positions. I maintain a healthy allocation to alternative assets as a ‘hedge’.

I will be opportunistic is when I buy into some names as I think in aggregate that the market is quite high and as such, would be maintaining my relatively conservative buffer. I also share some of my ideas in my recent podcast (Magic Markets Episode 7: 2021 Preview)

If I see markets a lot lower early in the year, I will not hesitate to use the ‘dry powder’ to take positions. I believe that the world is on the mend but will be nursing its wounds for much of this year. Volatility can be your friend, so make it work for you! And remember no-one ever discovered new lands by standing on the shore!

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