Over the past few weeks, I have done a lot of reading and YouTubing, from many diverse sources. Some pure investment, political, humour, and spiritual as well. Recently I came across the story, narrated by Richard Gere, of how the Buddha and Buddhism originated. This got me thinking as to how we can use certain spiritual precepts to guide our investment portfolios. Today’s article will show us how to use the middle road when investing. This philosophy can help you customize an appropriate portfolio, gain an acceptable return, and ensure you don’t blow up your life savings in the process.
Being raised in a Catholic household, and attending Catholic schools for the first 18 years of my life, there was never much exposure to the spiritual philosophies and teachings outside of my denomination. Later in life, curiosity has gotten the best of me, and discovering new and divergent viewpoints has been an exciting journey. The video on Buddhism is fascinating. It describes a young boy in ancient India, Siddhartha, who is born a prince. Siddhartha’s father, the king, keeps him in comfortable surroundings at all times. He protects Siddhartha from the sufferings of the world. Siddhartha eventually marries, has a child, and is all set up to rule as king for the rest of his days. However, some profound things happen to Siddhartha on a few subsequent journeys outside the palace. He sees poor men suffering, disabled, and dying. He is told that this is what happens to all men, regardless of being rich or poor, and that it will certainly happen to him. There is no way he can prevent this. Siddhartha feels compelled to leave his pampered life, shed all creature comforts, and he leaves wife and child to answer his calling. To shorten the story, after much meditation and personal suffering, Siddhartha becomes enlightened. He realizes that there is good and evil in the world, joy and pain, hatred and love, greed and generosity, and that one cannot exist without the other. Thus one of the basic tenets of Buddhism is that, in order to follow the path of enlightenment, one must accept both sides. This means that the ideal way is what is known as the middle road. Middle road thinking can really help you when investing.
When Investors Stray From the Middle Road
Over the past 21+ years I have witnessed hundreds of examples of investor mistakes made by straying from the middle road. For example, there are many who, for various reasons, are much too protective of their capital. I remember having discussions with a couple who personally experienced the 1930’s Great Depression. Their fear of potential loss drove them to insist on GICs and government bonds only. Even after I pointed out that, in such a low rate environment, they would most likely run out of money before they passed away, their fear forced them to one side of the pendulum. Being too risk averse is a mistake that is made quite frequently. Many times it is the result of previous losses, or negative experiences, which cause an emotional reaction rather than making decisions based on facts.
Just as frequently, I have witnessed the other side, where greed takes over. One of the more extreme examples of this was a client back in 2000-01. This gentleman was a newly retired Bell Canada employee. By virtue of his shares in BCE, the Nortel Networks spinoff created 5000 shares of Nortel into his account. Our discussions were at the time when NT was hovering around $100/sh. Essentially his NT shares alone were worth $500,000! As any prudent advisor would, I encouraged him to take his windfall and sell, and create a well-diversified portfolio. After a few frustrating conversations, it was clear that greed had taken possession of his brain, and there was no reasoning with the gentleman. The excitement and frenzy created by the media reinforced his beliefs. Brokerage reports from almost every major firm had NT targeted for $150, $200, and even much higher. Head of Nortel John Roth was the most recent CEO of the Year. Not only was this client losing out on millions by selling, did I realize what a tax problem the disposition of shares would create? Well, I think you can guess how this story turned out, and it wasn’t pretty. Nortel topped out at $124.50 I believe, then proceeded to tank, plummeting to the 70’s, settling around $30, $15, then eventually settling around a buck a share. No need for diversification now. And that tax problem? It pretty much solved itself.
Nowadays, discussions with investors sometimes lead to straying from middle road thinking, and it can be frustrating to witness. An investor will look at three investments, one paying 6%, the second 8%, and the third 10%. Naturally, greed and inclination pull them toward the 10% product, without even a passing consideration of the amount of risk taken. There are many instances where 6 or 8% are fantastic returns, when compared to risk, and when the highest yielding product is simply too risky to purchase.
Another current example, especially for Canadian investors, is energy. The reason so many portfolios have severely declined recently is simple: Too much money in Canadian stocks, which are heavily resource-based, and your portfolio takes the full hit.
Ignoring private products and other alternatives, and sticking with stocks and mutual funds-only, are also all too common examples of straying from proper balance.
Using the Middle Road when Investing
The basics can be summed up this way:
- Not too many guaranteed investments such as GICs and government bonds
- Not too much money in the stock market. Diversify geographically as well as by sector.
- Not too much money in insurance-based products
- Not too much money in private and other alternative products
- Don’t sit on too much cash
Curating that appropriate mix of non-correlated investments, which not only grow but protect in challenging times, is the essence of the middle road. Sometimes the most effective methods are the least exciting.
I never imagined incorporating spirituality into an investment blogpost, but here you have it, there is definitely a lesson to be learned from Buddhism and the middle road philosophy. If you want your portfolio to survive and thrive, especially in these uncertain times, try taking the boring, middle road approach. If you are interested in finding out how to use the middle road approach to investing, simply fill out this confidential form. There is absolutely no obligation.