This Week…

We’re digging into the art of the pivot… When market dynamics shift, it’s easy for investors to be caught off guard. But if you can spot those changing tides, you’ll be positioned for success in a new environment.

Our expert today is Russell Clark, the CIO of Russell Clark Investment Management.

After 2 decades in the industry, Russell realized that the economy and market were functioning drastically differently post-COVID. That realization changed his entire framework — from how he builds conviction to what he trades and his time horizons.

In this issue, we’ll cover 3 things:

• Recognizing when your investment thesis is wrong — before it’s too late.
• Learning to adapt your framework in a new market environment.
• Implementing your new framework at inflection points.

Let’s get started.

LEVEL 1 — Realizing You’re Wrong

Russell’s framework is a blend of macro and micro investing. He analyzes big picture trends. Then, he drills down on micro trends in specific sectors and industries.

For years, that approach allowed him to spot shifts in the business cycle.

• “I’m a big believer that financial markets need harmony,” says Russell. “If you have a big move in oil prices, then you’re going to see weakness in industrials.”

But post-COVID — after a historic amount of liquidity was injected into markets — many of the trusted correlations between macroeconomic conditions and various asset classes and sectors stopped working. 

“It was a bit of an existential crisis, because my entire way of thinking about the financial world stopped working,” says Russell. “I had to decide if I should find a new profession or were all of these changes a sign of some bigger fundamental shift.”

LEVEL 2 — Adapting Your Investing Framework

Operating within your own investing framework is an essential part of investing.

Step back: When the markets and economy began contradicting his framework, Russell went back and studied the policies implemented after the Great Depression and all of the economic cycles that follow.   

Zooming out helped Russell see the new, large-scale economic shifts that are happening today.

🔑  The takeaway: Constantly reviewing what’s working and what’s not will allow you to adjust your framework accordingly — before a string of losses piles up.

LEVEL 3 —Investing at Inflection Points

Today, financial markets are at an inflection point. As the Fed continues to fight inflation, it’s unclear whether we’re entering a new inflationary era of high interest rates and strong labor, or just another reset within the same secular trend.

With so much uncertainty, Russell stresses the importance of a measured approach.

“Transitions between secular trends and a new market paradigm can take years,” he says. “That makes it even harder to aggressively catch the trend… I prefer to build positions that limit risk while the trend develops.”

Here are 3 tips for investors during economic inflection points:

• Take Your Time: Incrementally build positions. Patience is key while the trends develop.
• Don’t Sit on Losers: This is the time to cut losing trades and re-evaluate.
• Top-Down Investigation: Understanding the macro landscape will allow you to properly pinpoint the micro opportunities.

🔑  The takeaway: By laying the groundwork and limiting your risk while waiting for a new trend to develop, you’ll have the capital and conviction to pounce when the time is right.

Next time

Thanks for reading. In our next issue, we’ll dive into the world or Tech — where we’ve been, where we’re going, and how to invest for the next technological revolution.

See you then.

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