Brian O'Neil: Staying With It
Ask a CIO #7
This week’s newsletter comes to you from one of the endowment and foundation community’s most well-known and well-regarded investors.
Brian O’Neil was most recently the Chief Investment Officer of the $13 billion Robert Wood Johnson Foundation, a position he held for 20 years prior to his retirement in 2023. Prior to RWJF, Brian spent 22 years at Equitable (AXA/Equitable), where he also served as Chief Investment Officer. Brian remains an active member of the endowment and foundation community, serving on the Investment Committees for the Wallace Foundation and the Brooklyn Public Library.
Here at Ivy Invest, we are fortunate to have Brian as an independent Trustee and the Chair of the Audit Committee to our Fund1.
Those of us who know Brian know him for his deep and far-ranging experience, his patient investment approach, and his thoughtful, practical insights. I’m delighted that Brian is generously sharing his wisdom with our readers this week, and I know we’ll all leave as better investors.
—Wendy
Today I am happy to write about investing while Wendy has a little vacation. I thought I would try and share some of what I have learned over the years of investing for different types of portfolios, and find the lessons that would be useful to other investors.
Probably the single most important thing is that investing means perpetually dealing with uncertainty, and outcomes that are unpredictable and constantly changing. This means that both being "right" and being "wrong" are inherently temporary conditions, and all advice or counsel must be viewed in the light of this uncertainty. I think the goal of an investor should be to use a framework that recognizes this uncertainty, and that is tailored to the risk profile that best suits them. Finding and staying within that framework should be the primary goal of investing; today I'd like to write about how to do that.
But before focusing on how to find the right framework, I thought I'd spend a little time on a couple of the biggest mistake investors make, because understanding them, and how to avoid them, is a critical part of finding that framework.
One mistake that investors make is to extrapolate what's happening now, or recently, into the future. This is sometimes called trend following, or momentum investing, and the problem with this approach is that it tends to work for a while, and then flame out, sometimes spectacularly.
One obvious example is the tech bubble of the late 90s, which saw valuations stretched far beyond the limits or reasonability, but which lasted for several years before crashing far below its original starting point. Another would be the "meme stock" craze that began in 2021, and which has not ended well for most of its participants. And whenever the price of gold rises even briefly, the airwaves are flooded with advertisements to buy gold, gold shares, and even gold jewelry and coins.
Investing using this approach will have you consistently waiting until markets have performed well, then getting in towards the end of a market cycle. While it might not be fair to call it "buying high and selling low", it tends to lead to those outcomes.
If this mistake might be thought of as a naive approach, the next mistake is more sophisticated but equally liable to lead to bad results; let's call it the opposite of trend following, maybe "mean reverting". The idea here is that market movements often lead to reversals, and that these reversals are predictable and can be used as buy or selling signals.
While the idea of "buying on dips" is not necessarily a bad idea by itself, its corollary is selling on the upward movements, so as to have cash to buy on the dips. Implicitly this is an attempt to evaluate whether the market is "cheap" or "expensive” and act accordingly. The problem with this is that one can end up stranded: deciding the market is expensive, and then watching it go up even more, leads one to a very difficult place. While this approach is the mirror image of trend following, it is subject to the same problems of working well in some environments, but leading to bad outcomes more often than not.
While both of these approaches can work well for a period of time, they both assume that an investor can assess whether the market is cheap or expensive, and let that decision guide the level of market exposure. This is not only difficult to do, but it is not necessary! Investing does not require the investor to value the market and move in and out; there is a better way.
A more consistent philosophy can lead to better long term outcomes, and also avoid the pitfalls of both of the approaches described above. In her first letter in this forum, Wendy mentioned the virtues of the 60/40 (equities/fixed income) portfolio. I'd like to go back to that concept and emphasize that it's the consistency of the approach, matched with the appropriate level of risk (whether it be 60% equities, or more, or less, depending on you), that can make this strategy the best way to deploy your capital, now and in the future. You get diversification and the right level of equity exposure for you; that's the definition of a good long term asset allocation.
Investing this way means that you can earn the long term returns that the markets give us, which is really the best outcome. The demands on the investor are limited to decisions that you have the information to make: decide on your risk tolerance, use that framework, and then stay with it. And this last point – stay with it – is often the hardest but also the most important. In the years since the Great Depression, which will soon be 100 years ago, markets have often declined, sometimes drastically, but have always recovered. Having the staying power to wait through those declines, and to stay invested, is the real key,
I hope that these words help with your decisions about investing, and give you the confidence to invest and stay with it.
Brian O'Neil
The Institutional Investment Strategy Fund (“IISF”) is an investment company registered under the Investment Company Act of 1940. IISF is a closed-end fund operating as an interval fund that makes quarterly repurchase offers and as such provides limited liquidity. The fund commenced operations on March 1, 2024. An investor should consider the investment objectives, risks, charges and expenses of an investment. The Prospectus contains this and other information. Read it carefully before investing.
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