Risk and Reward

My first job out of college was working on cruise ships. Not quite Julie of The Love Boat, I explored the Caribbean, Alaska, and Europe as a Youth Activities Director. It was by far one of the most adventurous and exciting times of my life.

One day when we pulled into St. Maarten, there was a Royal Caribbean ship that had run aground dangerously close to nude bathers. At first glance, I could not figure out how a captain could be so incompetent or reckless to run ashore in such a fashion, but the story was much deeper than that.

As the story goes, the ship left port in the evening and the captain handed the helm to his junior officer so he could sleep off a few Red Stripes. The inexperienced officer poorly navigated the dark waters and ran straight into a reef which tore a huge hole in the hull of the ship.

It is at this point that I like to imagine a bleary-eyed captain tearing into the crow’s nest cursing like a sailor. Either way, the captain assessed the damage, promptly turned the ship back to port, and went straight into the shore at full speed. A risky move, for sure, but his bet paid off because as he rammed the ship into the sand it effectively plugged the gaping hole in the ship.

Problem solved… except for the thousands of passengers to offload, fines, dismissals of duty, and a ruined ship, of course.

This story came to mind when I heard about the downing of the Francis Scott Key bridge by a tanker multiple times the size of this cruise ship. But, when I saw the twenty-second clip for the first time (and I admit, I must have watched it a dozen times), my mind immediately went to the Sunshine Skyway bridge disaster in Tampa Bay.

If you don’t know the story, the bridge was brought down in May of 1980 when a cargo ship named the SS Summit Venture collided with one of the bridge's support columns during a severe storm, causing a large section of the bridge to collapse. Several vehicles plunged into Tampa Bay, resulting in 35 fatalities.

After recovering from this terrible tragedy, a new Sunshine Skyway bridge was carefully planned and built. I had the pleasure of sailing a 55 ft sailboat under the new Sunshine Skyway bridge – and let me tell you, it is impressive. I have studied this bridge and have read just about every newspaper article detailing the events that brought down its predecessor. The new bridge designed with high strength concrete, durable steel engineered to withstand high winds, more height than before and a monitoring system to predict structural weaknesses. The channel markers are very prominent before and around the bridge and it is very well illuminated with more nautical navigation aids. On top of that, there are enormous cement barriers around the bridge that could stop a tanker before it collides with the bridge and creates calamity and death. They also halt traffic around the bridge during major weather events.

This is not to say the bridge is indestructible, because we all know what happens when we say that about ships, right? Yes, you guessed it, we get a three hour and fifteen movie where the main character loses the love of her life but keeps her diamond.  

But that doesn’t matter because taking precautions is not meant to eliminate uncertainty. Best practices and precautions are taken to maximize the probability of reaching your end goal. For better or worse, after well over a decade as an investment manager, I see much of life as risk and reward.

When we sit in our formal monthly investment committee meeting, the one guiding question we always have is: Will we get rewarded for any risk we are taking with our portfolio? Followed promptly by: What if we are wrong?

And I think this is the key point. The point is not to avoid all risk, nor is it to have no uncertainty. The key is, from an investment management point of view, can we recover if we are wrong? Will we live to fight another day? Will our ‘hearts go on and on and on’?

If the answer to these questions is yes, we have a pretty good idea of our next move.

I hope this letter, replete with bad puns, helps give insight into our decision-making process.

Here are some other directional convictions we have:

1. Diversified Portfolios Are Winners: Having a mix of different types of investments is generally a good idea for both short and long-term gains. A portfolio split60/40 between different types of investments has done better than just putting money in low-risk funds in about 70% of the years. On average, it's earned about 6% more. Over time, the chances of making more money with this kind of mix have only gotten better.

2. Sticking With Good U.S. Stocks: Companies that are considered high-quality in the U.S. have been doing well, especially in the last quarter of the year. This makes us feel positive about the future of stocks. We still like bigger, well-established companies, but we're also looking at some smaller ones that we think are undervalued.

3. Bond Markets Are Getting Realistic: The way bonds are being traded now shows that people are thinking more realistically about what the Federal Reserve might do with interest rates. They're expecting the Fed to lower interest rates by 3-4 times starting later this summer. Because of this, bond prices went up. We feel good about this.

In Abundance,

Brandon Hatton on Behalf of Conscious Wealth Investments

President, Chief Investment Officer

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