BMO Nesbitt Burns
885 West Georgia Street
Posted on: July 25, 2019
A Recipe for Returns
In my last piece, I suggested that “the holy grail of every investor is to have an investment process
that’s fluid enough to change a portfolio’s positioning as the business cycle and sentiment is
I know what you’re thinking, “did Robert just quote himself?”
The answer is yes—yes, I did. But, you may also be looking for a little context to this essential
investment principle. So, let’s put a real world spin on the importance of “the process” that relates
to all (or most) of us, cooking.
Now, I won’t profess to be a whiz in the kitchen. I know enough to follow a recipe for the best
results, which in a way is the overarching point of this comparison. But, to better prepare our palate
for what I’m serving up, I want to make an important distinction:
Investment Process = Recipe
Investor Risk Tolerance = Taste
Investing Sentiment = Temperature
Follow a recipe.
First and foremost, not all of us can be Gordon Ramsay (or in our case Warren Buffett). To become
a Masterchef® you need to learn how and when ingredients should interact in order to prepare a
composed dish. Most recipes start with a base ingredient, something sturdy that allows other
ingredients to shine through and aligns with our initial plan. Much like investing, we don’t just start
cooking—it starts with a plan like “I feel like steak tonight,” or a goal like “I need to lose 10 pounds
in the next two months.” Once we have this framework, we start to assemble a set of
complementary holdings that accentuate our base before seasoning to the investor’s willingness
to take risk.
Let’s say we start with a base like chicken. This is a staple of many diets and, like chicken, certain
holdings provide the same level of stability to portfolios. From here, we assess two things. First,
investor risk tolerance and then investing sentiment (which we’ll get to) in order to establish the
desired flavour profile. In the case of investor risk tolerance, a spicier spin on our base ingredient
will produce a volatile range of responses. Some may like the heat of a jerk sauce while others are
sure to hate it; this is the repercussion of high-risk, high-reward. On the other hand, a safer (some
might say “bland”) approach will produce more certainty. Cordon bleu may not be as exciting, but
it’s less risky and more likely to appease your goal of generating long-term return.
Know your temps.
Taste is two-fold. There’s the flavour profile of the investor and then there’s the temperature of the
economic climate. Investing sentiment considers to what degree we’re willing to pursue returns.
This might be the most pivotal piece in the entire process because you can’t dictate sentiment or
policy. In some cases, you might want to “kick it up a notch” (shoutout to Emeril Lagasse) to ride
the wave of a prevailing industry segment. I’d equate this to cooking on a skillet with hot oil—it’s
likely that you’ll get burned if you’re not paying attention. In other cases, political factors like the
threat of a trade war might require a more conservative approach. This would be like a simmer,
intended to control what might be boiling over between trade partners.
* * *
What’s my recipe for success? The short answer is, “it depends.”
For me, like cooking, investing is like a well-composed bit of chaos. There are a number of ways to
configure a portfolio that tempts the tastebuds, but the true art is in remaining disciplined. Control
what you can, anticipate what you can’t and adjust along the way.
Cooking is like painting or writing a song. Just as there are only so many notes or
colors, there are only so many flavors - it's how you combine them that sets you apart.