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Posted by on Apr 8, 2014 in ETF Strategist

What Wildland Firefighting Teaches About Investing

What Wildland Firefighting Teaches About Investing

by Roger Nusbaum AdvisorShares ETF Strategist

Every spring is very busy here in the Prescott area with various training opportunities related to the wildfire season. The Arizona Wildfire Academy occurs in early March, then later in March is the Prescott Basin Operations Drill (a huge annual inter-agency drill) which occurred Friday and then this past Saturday our department had its annual Wildland Refresher known as RT-130.

You can Google the term RT-130 to learn more about it but essentially we review what are known as the standard fire orders and watch-out situations, we practice how to deploy a fire shelter, then we go over a couple points of emphasis from one of the websites you’ll find if you Google RT-130 (this year was the dangers of smoke and the propensity for fires to be most likely to blow up between 1400 and 1630).

Just as it is important to refresh on wildland firefighting it is also important to refresh on investing, more specifically your chosen investment approach. And just as it is important for what we know about fighting fire aggressively to evolve as we learn more (the increased danger between 1400 and 1630 is new information for our department) so too must what we know about investing and markets evolve as well as our engagement with markets.

One quote that popped up during all of this training that is directly applicable to investing was “before you can think outside the box, you need to understand what is inside the box.”

We’ve written before about fixed income investing possibly becoming more complex if/when interest rates normalize. Most investors know what is inside the box in terms of laddering, mixing credit quality and the inverse relationship between prices and yields. What might outside the box, or the equivalent of fighting a wildfire between 1400 and 1630 is managing an income portfolio during a prolonged period of rising rates.

Where a simple treasury ladder was sufficient for a successful outcome for many years, that simply will not cut it any longer; the US Treasury has admitted as much when it recently began issuing floating rate debt.

There will be investors who do not take the time to learn how income investing will evolve; invariably these folks will get torched owning closed end funds thinking that because they are collecting 7%, a price drop won’t matter but of course funds don’t have to come back from a large decline and there are no guarantees that today’s payouts will remain the same.

I write about this frequently because I believe it is important and because many investors stand to get hurt if rates ever rise meaningfully.

In a similar vein, equity investing might be facing a less dramatic shift. After years where foreign investing outperformed, the pendulum swung back to domestic for the last couple of years but over the last three weeks foreign, especially emerging has dramatically outperformed domestic.

Three weeks is obviously not meaningful, this is the start of a shift or it isn’t, but part of an investment refresher is to tie back into the idea that nothing can outperform for all times. If now is not the start of a shift into foreign then it will come later.

There was an interesting quote in Barron’s this week that relates from Chris Brightman of Research Affiliates who said “You have to be willing to be contrarian and underperform for periods of time — sometimes years.”

That applies to more than contrarian investing, it applies to all investment strategies. Value investing comes and goes out of favor as do various forms of rules based investing and any other form of investing but something like GARP (for example) which is valid even if not your preferred method, can still get the job done in the context of a long term investment strategy.

Part of long term success means not becoming impatient during one of the periods where your preferred strategy happens to lag.