When Hannibal and his army of Carthaginians threatened to bring down Rome and its Empire, the Roman generals favoured a strategy of direct confrontation in a large scale pitched battle. This led to the disastrous defeat at Cannae in 216 BCE. Following this, and understanding that he could not defeat Hannibal in the field, the Roman Dictator Fabius adopted a strategy of cutting the enemies’ supply lines, harassing it through guerilla warfare, and at all costs, delaying and avoiding direct battle. This proved to be a huge success; Hannibal was defeated, and Fabius became known as “Cunctator” or delayer.
Military metaphors are common in the investment world, but it is the rare investor who wishes to be known for inaction. Yet, sometimes, doing nothing is the right thing to do. Most of our clients know that for the past year we have been concerned that interest rates, particularly longer term interest rates, are due to rise. A significant increase in long rates would be bad for longer bonds and for stocks which we have purchased primarily for their dividends, such as utilities, pipelines and telecoms. On the other hand, rising interest rates are good for precious metals and other commodities.
Had we acted quickly, we would have sold assets in the interest sensitive categories and bought more commodities, and as it turns out, we would have been 100% wrong. The fact is that long term rates have continued to decline over the past year as a slow US recovery and ongoing problems in the Euro Zone have caused central bankers to keep rates at record lows.
In the investment business, it is not enough to be right. One needs to be right at the right time. Had we acted on our forecast of higher rates, our clients would be holding more of the volatile commodity stocks which have led the Canadian market downwards in the past year. Instead, our very low weighting in energy and materials stocks has beat the market by a wide margin. In the face of a conflict between fact and hypothesis, we have chosen not to choose. Until we have firm evidence of a continuing trend, we will wait. Like Quintius Fabius, we are delaying, which is sometimes the best strategy.
“His reputed want of energy then was recognized by people in general as a freedom of passion; his slowness in words and actions, the effect of a true prudence; his want of rapidity and his sluggishness, as constancy and firmness.
Plutarch’s Life of Quintius Fabius
