Commentary

Buffett, Icahn and the Canada Pension Plan

All of the above are similar in that they have achieved extreme investment success over a long period of time, have direct access to the best financial analysts and tools, and have significant resources that have been dedicated to their investment objectives.  Who would not want to invest like the above?

All are also similar as in recent months they have had significant financial losses.  Their past success, best financial analysts, best tools, and endless resources were unable to shield them from significant investment mistakes.  In a previous blog Scott has already mentioned the $1 billion blunder of the Canada Pension Plan as it related to their significant stake in Royal Caribbean Cruise Lines.  Warren Buffett, through Berkshire Hathaway, announced that they exited the airline sector during the first quarter of 2020.  I have seen analysis suggesting a $5 billion loss on their airline positions.  Carl Icahn became a member of this prestigious group when he sold his investment in Hertz at $0.72 per share crystallizing a loss of $1.8 billion.  Fine company indeed!

Investing is not easy folks! With on-line investing you proceed at your own peril.

While we at MP Wealth are obviously not Buffett, Icahn or the CPP, we do have a secret weapon that we call Pivot.  The ultimate power of Pivot results from the fact that it does not consider the newsy market headlines.  In today’s environment the narrative de-jour is obviously, clearly, the global economic collapse and job loss devastation arising from covid-19 and the negative impact this is going to have on the stock market.  The stock market implosion is obvious, who could think anything else, all you need to do is listen to CNN, Bloomberg or any other news media and open your eyes to the reality!  Interestingly, that is not how this has played out so far.

In the past, my biggest investment mistakes have been made when my belief in the narrative (whether positive or negative) superseded the prevailing market reality, ultimately leading to a paralyzed and incorrectly positioned approach.  In these “narrative investment error cases”, an investor effectively becomes a slave to his or her beliefs.  Icahn believed in Hertz until he didn’t, ditto for Buffett and the airlines, and the CPP and Royal Caribbean.

When the market moves in line with the investment narrative you have constructed, it is natural to feel as though everything makes sense and is as it should be – things are moving up or down as expected, how could it do anything else?  In this case, no harm is done.  Significant harm can be done however, when you stick to your story/narrative in the face of a market that is trending in the opposite direction.  Make no mistake, this is the dangerous case, this is where errors lurk – this is when narrative bites back.  Thankfully, when cognitive dissonance occurs, Pivot shines.

Many investors currently find themselves out of the market and not participating.  After all, with economic data that is arguably as bad and maybe even worse than the great depression, there is just no way the market will grind higher…. but it is.  The prevailing narrative does not align and investors are missing out – danger lurks.

Pivot was intentionally built to ignore narrative – to help us avoid the danger of fairy tales.  Instead of fictions, it pays attention to the underlying health of the market by using “non-fictions” which are represented by the hard data of economic measures of supply and demand (many have asked us what the measures are – I will be blunt, we are not giving away our secret sauce).  The objective of Pivot is, and always will be, to quantitatively identify the intermediate direction of equities.  It proved successful at the end of February when we pivoted out of equities, and again at the beginning of April when we pivoted back in.

To summarize, investment narrative is most dangerous when it misaligns with current market direction and an investor stays with his or her story continuing to fight the market.  Currently in my mind the narrative is terrible, and it seems that it is not set up for a positive market outcome.  But, my narrative does not matter as Pivot is signaling the opposite.  By understanding the underlying health of current market set-up, and ignoring the covid-19 narrative, we are ensuring mandate participation in an upwardly trending market.

Maybe we should give Buffet or Icahn a call and help them out.  But I suspect they are likely to be uninterested as your MP Wealth team forges forward.  As always, our goal is to protect capital when needed and generate stable returns in positively trending markets.

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