Winning by not losing: a steadfast approach to garnering long-term investment results

2024 was a banner year for global equities. While developed markets largely ended the year in positive territory, concentration once again proved to be a dominant theme. South of the border, only a handful of mega-cap names led the charge within the S&P 500 Index. But in no way was this exclusive to the U.S. equity market. Currently, all of the top ten constituents of the MSCI World Index are tech-focused, large-cap U.S. names, a stark reminder to prioritize diversification when investing globally.  

Being agnostic as to whether a company should be categorized as magnificent is what drives our thought process, and we instead remain laser focused on our Be Boring. Make Money.™ investment approach. In laymen’s terms, being boring means adhering to our disciplined, bottom-up approach and not indulging in the flavor of the month. It involves selecting quality companies with durable competitive advantages and long-term risk-adjusted return potential. We also seek to humbly balance risk—which we define as the possibility of permanent loss—with not taking enough risk. Of course, there’s also FOMO, or the fear of missing out—a risk that we’re more than happy to miss out on!

This is where our value lies historically. During the early days of Brexit, President Trump’s first presidency, and COVID-19, our focus has always been crystal clear: to limit downside in volatile markets and deliver strong absolute returns in up markets. We believe this is the Make Money part, which essentially allows investors to compound capital from a higher base and over a longer duration. The most important element to compounding is time and durability. A snowball growing very fast down a short hill doesn’t compound as well as a snowball rolling at a slower rate down a long hill.

Being boring means adhering to our disciplined, bottom-up approach and not indulging in the flavor of the month. It involves selecting quality companies with durable competitive advantages and long-term risk-adjusted return potential.

Where we do not participate

Say you wake up one morning and choose to cross over a four-lane highway with your eyes closed. What are your chances of getting to the other side in one piece? For argument’s sake, let’s just say you make it across unscathed. Would you consider this to be a wise choice? While outsiders might consider this to be a remarkable feat, are they really aware of the risks you took to get across?

With seven companies responsible for a significant portion of the MSCI World Index’s return in 2024, we’re cognizant of the risks of jumping on the AI train. We remain wary of partaking in market enthusiasm of any sort—as popularity is risk for the rational investor—and would much rather focus on being responsible stewards of investor capital. For us, being diversified by country, sector, and market-capitalization trumps any fear of missing out on the next big thing.   

While we don’t particularly shy away from companies that use AI in their everyday applications, we’re cautious about rallying around enthusiasm within AI infrastructure. How sustainable are returns in this space? How viable is capex spending across U.S. big tech? How lofty are valuations? Think of buying a house—while hundreds of beautiful homes may be up for sale at any given moment, some may be overpriced while others may be prone to structural issues down the line. The same principle applies to security selection: we seek to strike an optimal balance between price and quality, all while ensuring we’re adequately compensated for the risks we take. 

Say you wake up one morning and choose to cross over a four-lane highway with your eyes closed. What are your chances of getting to the other side in one piece? For argument’s sake, let’s just say you make it across unscathed. Would you consider this to be a wise choice? 

Avoiding the relative return trap

Solely focusing on high-profile tech companies can greatly narrow your opportunity set—especially if you’re looking to differentiate your portfolio. Exploiting the sheer size of the global sandbox can help you avoid concentration and open the door to opportunities that the market may be ignoring.

In our view, there are plenty of investment possibilities across the so-called S&P 493 Index (the S&P 500 Index less the Magnificent 7 stocks). Outside the AI infrastructure and semiconductor capex space, there are other U.S. based companies that align with our rigorous process. Our global equity approach doesn’t involve investing in one region alone. Positions are held in companies from various sectors across Europe, Canada and Asia. They also include companies of various capitalizations, notably small- and mid-cap names, which tend to have higher growth potential.

To ensure we’re positioned to withstand all market environments, we need to be aware of the pitfalls associated with making index comparisons. This is especially true today. Global indexes are not as diversified as they once were. For instance, at the time of this writing, U.S. equities represent approximately 74% of the MSCI World Index, with the top 10 constituents highly concentrated by region, market cap and sector.  

In light of this reality, we believe monitoring risk and return on a relative basis should take a backseat to an absolute risk and return focus (which we feel contributes more favourably to long-term outcomes). Rather than obsessing over how portfolios are stacking up against a benchmark, we prefer to protect capital and sustain long- term growth potential. By sticking to a decision-making framework centered on accountability, we seek to carefully understand the risks at an individual security level, monitor how portfolio securities interact with one another, and keep an eye out for unintended biases that may counter our investment thesis.  

To finish first, you first need to finish

With 2025 in full throttle, we believe it’s important to tread with caution. Rising government debt, coupled with escalating geopolitical risks, trade tensions, and the overspecialization of economies (i.e., some countries depend largely on the fate of specific industries) are casting doubt on the overall backdrop.

Amid this environment, it’s important to maintain reliance on company fundamentals and avoid brash overreactions that could put long-term performance at risk. Stints of momentum in high-growth sectors such as AI infrastructure could weigh on relative performance in the short run, but our approach is one that focuses on limiting downside capture and garnering long-term results.

One of the biggest risks, at present, is to succumb to greed and the fear of missing out. The concern that someone else could get richer faster can get in the way of basic risk management principles and sound diversification practices. What if Mag 7 stocks suddenly fall out of favour? What if they don’t? Our goal is to safeguard investor assets and to avoid predicting the future. By probabilistically positioning ourselves, we can bolster our resilience to multiple scenarios. After all, obtaining long-term investment results is our ultimate goal.