Unlearning to Learn

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Investors Experiencing Change

As investors, we are also going through a significant change. Markets have been sanguine regarding the pandemic. After the initial sell-off, the global wave of government and central bank intervention provided liquidity and gave investors confidence that the hole in economic growth would be filled. As a result, asset prices, including stocks and bonds rallied significantly. As did asset prices in other areas such as private equity, real estate, autos and art.

Now, markets must face the reality of a post-pandemic environment. One in which economic growth isn’t aided by central bank intervention. In fact, one where central bankers aren’t just letting the punch bowl run dry but are going to take it away. The post-pandemic hangover effect of lingering supply-chain issues. And, the new geopolitical effects of a war in Eastern Europe. While we acknowledge that the investment environment is ever-changing, this all represents significant change.

The interest rate environment represents one of the biggest changes. The Federal Reserve is trying to navigate a move away from its years-long 0% interest rate policy. As a result, Treasury yields have risen significantly. The two-year Treasury yield has risen from 0.25% to more than 2.3% in six months, reflecting the future for short-term interest rates.

When managing a bond portfolio, we must keep going back to our foundational principles of liquidity, interest rate risk and credit quality to manage change and take advantage of this new environment. Keep liquidity a bit higher, begin slowly taking more interest rate risk (because rates have moved higher already) and watch credit quality in the face of weaker economic growth.

We also know that stocks have been more volatile. To adjust to the change, we can think about the foundational principles affecting portfolio construction. The stock portfolio represents many different styles of investing, from the size of the companies we own to their future growth potential and the industries they represent. Diversifying across these areas makes sense. Recognizing that higher interest rates benefit some areas more than others we can lean into those more. Also, knowing that economic growth will be positive but not likely meet previous euphoric expectations suggests there’s benefit in owning quality growth companies over those that might do better when the economy is growing well above trend.

The “reopening trade,” i.e., owning companies benefitting from the pandemic, is likely over. Still, there are likely fundamental changes in how we think about entertainment, working from home and commuting that will have a lasting effect. If there is anything in our lives that suggests we can learn to adapt and change, it is the pandemic!

On Knowledge and Wisdom

In Adam Grant’s book Think Again, the author talks about the importance of our ability to rethink and unlearn. He notes that “If knowledge is power, knowing what we don’t know is wisdom.”

As investors, our environment changes rapidly, and we must make decisions using our foundational principles to find advantage. As business managers, we need to adapt to best serve our clients. As an athlete, undoing and relearning is part of the process of creating success. Our world changes all the time, so knowing how to unlearn and be open to change is critical.