Authored by Steven Novakovic, CAIA, CFA
As we ring in the new year, it is once again time for the annual tradition of resolutions. In this edition of Chronicles, we highlight a handful of resolutions we believe are worthy of keeping. To paraphrase everybody’s favorite finance quote machine, Warren Buffett, last year was a period where the tide went out and we discovered who was swimming . . . well, we’ll let you look up the rest of the quote. If you found yourself swimming with those investors last year, then 2022 was probably an even worse experience for your portfolio. With nearly all major central banks aggressively raising interest rates throughout 2022, bond prices plummeted and stock valuations came back to earth. The year was a perfect storm for left tails, drawdowns, and overall losses. If you are starting 2023 knowing you still have some resolutions to make and want to keep avoiding the same mistake again, then we’ve got you covered.
A robust due diligence process goes a long way towards identifying bad actors, misalignments, weak internal systems, and inappropriate return expectations. In this opinion piece from Institutional Investor, the author talks about the importance of trust throughout the due diligence process. Far too often, allocators accept non-specific answers or get stonewalled behind proprietary information. Why do allocators accept such answers during the diligence process and ultimately increase risk? The due diligence process should be the optimum example of “trust but verify.” We don’t have to name names to remind everyone that 2022 was a year in which several high-profile investors were revealed to have made major investments based on trust without verifying.
Warren Buffett’s swimming quote has many similarities to the classic scene of the cartoon character, Wile E. Coyote, running off a cliff only to fall to the ground once he’s looked down and realized he is no longer on Terra Firma. In many ways, private market valuations in 2022 felt a bit like Wile the moment before realizing he was about to have a long fall. This Barings piece on Real Estate Office property valuations addresses this issue head on. Spoiler alert! It isn’t just the fault of appraisers — investment managers should bear some responsibility as well for valuations without any ground to stand on.
Just as the tide rises and falls, so does liquidity in the markets. 2022 was a year in which liquidity dried up across several private markets. For investors with capital, this can be a great opportunity, however for those in need of capital, a lack of liquidity can be fatal. Bruce Stachenfeld, the Real Estate Philosopher® writes about the current liquidity crisis, describing it as A Faux Liquidity Crisis, and discusses how to best navigate through it. One of his important observations? There is plenty of liquidity sitting on the sidelines, it is just a matter of knowing how to access it.
Finally, you can’t have a New Year’s letter without a year in review article. We’ve chosen this helpful 2022 postmortem piece published by Morningstar. In it, the author discusses four lessons we (re)learned during 2022, including the risk or relying too heavily on history, failing to diversify, and thinking we can predict the future. The article concludes with tips to avoid making mistakes in the future. While their first tip could have been taken straight from the pages of our Renewed Professionalism piece, we’ll highlight the final tip [portfolio] robustness — the ability to withstand different stages without compromising long-term performance.
The CAIA community certainly understands the importance of focusing on the long-term, therefore, we’ll end this edition of Chronicles wishing you the best in 2023 and beyond.
