Investing in the TAO (Pronounced DOW)
“DO SOMETHING!’ the heroine wails, her fabulously flushed, mascara-streaked face filled with anguish. And so, the Man of Action does…and saves the day and they all live happily ever after.
Action men such as James Bond and Jack Reacher have become the heroes that we admire. It is our expectation that doing something, anything, is ‘better’ than doing nothing. And so it is that we’ve come to expect that doing something is what will provide the solution, ultimately deliver the required outcome.
But, is this in fact the most constructive approach? As I’ve skipped and stumbled my way through this wonderful journey called life, one of my greatest teachers has been the philosopher, Alan Watts. Through his teachings, he introduces and expounds on the philosophical system of Taoism and the teachings of Lao-Tzu who was a Chinese philosopher credited with founding of Taoism.
Wu Wei is a Chinese concept central to Taoism and a core theme of Lao Tzu’s Tao Te Ching. Translated literally as ‘non-doing,’ Wu Wei is not so much about ‘doing nothing’ as it is about aligning our movement with the greater flow of life. Often referred to as ‘natural action,’ Wu Wei does not involve excessive effort or struggle, but a kind of ‘going with the flow’ where we are able to move with the energy of the moment and respond freely to whatever situation that arises.
Some people intuitively interpret ‘non-doing’ as something passive, laid back or lazy. In the eyes of Tao, there are times for action, but if no action is needed based on the laws of nature, then doing anything may be ‘overdoing’. In fact, sometimes action can do more harm than good.
As Lao Tzu says in the Tao Te Ching: “I do nothing and yet nothing is left undone.”
And so, no doubt the reasonable question at this point is ‘what the hey-diddly-ay has this got to do with asset management?’
As many of you know Gryphon manages two multi asset funds that are somewhat unique. If it’s time to be in equities, the funds are fully exposed to equities; if it’s prudent to be in cash, the funds are fully invested in cash. The decision to move between asset classes is determined by our own proprietary indicators. Thus, the portfolio manager of these funds, Abri du Plessis, loves to very modestly declare that all he has to do is sit on his hands and do nothing. (He will also tell you that if you sit on your hands, it keeps you from fiddling where you shouldn’t fiddle.) But doing nothing is still doing…the challenge is non-doing…the ‘action of no action.’ But, this can be a lot more difficult than it sounds and so I was inspired to write this article.
Lao-Tzu says, "The scholar learns something every day. The man of Tao unlearns something every day... until he gets back to non-doing."
Going back to July/August of 2018, Gryphon’s investment team did not expect equities to outperform cash on a risk-adjusted basis, and consequently the Gryphon multi asset funds moved out of equities at the end of August 2018…yes, 2018, and they have been fully invested in cash ever since!
As mentioned earlier, these decisions are based on proprietary indicators which are fully and clearly unpacked in an earlier article that can be found here. We constantly monitor the pulse of our patient and communicated an update in an article called Waiting For The Lights To Change.
What is important for us to explain clearly is that Gryphon’s investment philosophy in no way incorporates any predictions on the future – based only on historic data, we had concerns about the health of financial markets. While it may seem that we can sit smug and snug with hindsight, this has certainly not been a comfortable path taken.
Heading towards the end of 2019 it appeared to some as if we had made the wrong decision. However,
for the period 1 September 2018 (around the time we moved into cash) to 31 December 2019 equities returned 2.5% on a total return basis;
Gryphon’s multi asset funds returned around 10%.
This means that despite the volatility and the supposed “good” year of 2019, equities actually never recovered the losses they suffered in the second half of 2018.
We’re going to lift our skirts a little to give you some insight into our practice of non-doing. Same as for Pinky and The Brain taking over the world, the work of managing portfolios is relentless – constant reviewing of markets, both local and global, monitoring indicators and reviewing news flow and data.
Early in January this year, some of our indicators suggested a move into equities may be imminent – so begins the most challenging aspect of Gryphon’s philosophy – all indicators must unanimously signal this buying opportunity. Intuitively and emotionally, the will was there to make the shift into equities and take advantage of the market momentum that appeared to be building. However, the team remained engaged and in discussion and, as a result, resisted the human inclination to second guess the process and jump aboard the happy train. This is how I’ve watched non-doing ask even experienced investment professionals to dig deep.
Some may call this lucky; I’d have to say that I have not seen luck work this hard or spend so much time in deliberation and discussion.
We are comfortable with our action of non-doing – we trust that our decision to move into cash at the end of August 2018 and remain there was the appropriate one. Although this was tested again as mentioned with the arrival of 2020, tempting investors with the display that equities were the asset class de rigueur with the All Share Total Return Index delivering 3.4% up to the 17th of January 2020 and U.S. markets storming to new highs.
The patient’s health, however, continued to deteriorate and as we now know, the patient had contracted a virus. Whatever rationale market commentators may provide to explain the drubbing equities have taken over the past few days, we would simply say that the vital signs have been indicating signs of ill-health for some time.
Bearing in mind the mantra of the medical profession, ‘first do no harm,’ performing an operation on a patient who will not survive it for the sake of doing something, would not be considered prudent. Similarly, exposing your portfolio to equities at this point in the cycle will not be good for your financial health.
We maintain our holding in cash in both our multi-asset funds and, as can be seen in the performance table below, investors in the fund will be pleased.
The challenge for any fund manager is to find the balance between confidence and arrogance – to find the space where you can plant both feet and stand firm regardless of the winds of chaos and fear…and implement the non-doing as required.
While action figures like Spiderman, Superman and Batman remain favourites among children, maybe it’s time for a new set of heroes – men of non-doing – perhaps we’ll see a new range of figurines available on line shortly, namely HH Dalai Lama, Lao Tzu and the Gryphon investment team in capes.