The Great British Bake Off, a competitive baking show, has become somewhat of a phenomenon – not to mention one of my favourite shows. With ten completed seasons and dozens of spin-offs and reboots in other geographies, it’s a welcome change to much of competitive reality TV with its congenial atmosphere and lack of manufactured drama. It’s also a show and competition which offers several parallels to investing and personal finance. Each episode is organized into three challenges on which the competitors are judged: the Signature Challenge, in which competitors bake their own favourite recipes, the Technical Challenge, in which they bake tricky recipes with limited guidance and instructions, and the Showstopper Challenge, in which they bake extravagant, professional-looking creations. All three challenges can provide perspective on important investing paradigms.
The Signature Challenge is unique on the show because it’s the challenge in which competitors can bake recipes they would actually make for friends and family. With practice, experience, and refinement, the competitors can perfect their creations and present an end product based on their unique skills. Just like bakers choose the creations that best showcase their talents, investors must choose and construct a portfolio based on their experiences and goals. With careful analysis of historical data and forward-looking expectations, investors must create a sensible, diversified portfolio aimed specifically at their needs both now and in the future. There exists no “perfect portfolio” for everyone. Just as one baker might specialize in cakes but struggle with breads, a portfolio must build on its owner’s strengths while mitigating their liabilities.
The Technical Challenge tests the competitors’ ability to quickly adapt to difficult situations. The bakers often have never baked – or even seen – what’s requested by the judges, and the recipe’s instructions are usually woefully incomplete. For example, one technical challenge had the bakers make Kransekake, a Norwegian special occasion cake shaped like a tree – the bare-bones recipe left many of the competitors quite confused. The bakers are forced to create, measure and monitor based on intuition and any relevant experience they have. Investors face similar challenges. While historical data can be useful, no amount of information can predict the future. In the face of changing market conditions and investor goals and objectives, portfolios must be built to be dynamic and adaptable, and positioned for a future full of unknowns.
The Showstopper Challenge is the challenge for which competitors are offered the most time. They are expected to produce a magnificent creation based on the episode’s rules which reflects their own personality and tastes great, too. The tie-in to investing here is a bit more literal. In investing, it’s often more important to avoid mistakes than it is to try to win big bets. For many investors, including our clients, the top priority for an investment portfolio is to preserve capital. That is, to avoid mistakes that can “stop the show” and postpone goals for retirement or other major life plans. In retirement, capital preservation means minimizing the portfolio drawdowns that deplete the value of capital and, in the accumulation phase, it means avoiding sectors and securities that can lose significant value with no possibility of recovering. In 2000, Nortel Networks represented one-third of the value of the TSX. A couple years later, it was worthless. In September 2018, Canopy Growth, Aurora Cannabis, and Tilray had a combined market capitalization of over $45B. Since that time their values have declined by 60%, 80%, and 90% respectively. Returning to the values they once held will, at the very least, take some time, and this has certainly had a serious impact on investors’ ability to meet their goals in the future. So, while the bakers on the Great British Bake Off are trying to create an epic Showstopper, for investors, we want our portfolios to grow – the show must go on!
Creating a customized, sensible, and dynamic investment portfolio carries many similarities to masterful baking. Through careful analysis, ongoing monitoring and discipline, we have helped our clients prepare for retirement, major purchases, and other financial goals for over 25 years. Doing so may seem simple – but not quite a piece of cake.