The Rationale Of The Asset Classes: The Bedokian Portfolio 300th Post Special

I was asked a few times on the asset classes in the Bedokian Portfolio, specifically on why I had included them. In fact, I had mentioned the rationale in my eBook, which I will reproduce here¹:

“Both equities and REITs provide dividends, with the former having higher potential capital growth; Bonds give a stabilising effect when equities and/or REITs are weakening, while still earning coupon payouts; Commodities, though it is a non-yielding asset class, give the necessary softening of the overall portfolio from volatility; Cash, though acting as a pool of liquidity, could still be an interest-bearing instrument.”

 

Picture generated by Meta AI

For the past decade, we had seen the “Sunday” and “Monday” moments for each of the asset classes; equities lead the charge most of the time, save for the COVID and accelerating interest rate periods in 2020 and 2023-2024 respectively; REITs were the darlings for dividend investors, until COVID and high interest rates pressed them down; bonds were riding high during COVID as a flight to safety; commodities in general were muted until the post-COVID geopolitical uncertainties kicked in; cash languished until high rates spurred interest in treasury bills and fixed deposits.

 

The basis for all these is due to the different behaviours of each asset class under different economic conditions; in other words, they have different correlations with one another. If you had read the previous paragraph, not all of them had a bad time together, nor a good time together, too. In this way, our Bedokian Portfolios do not suffer the high swings of down and up experienced by an individual asset class, because if one or some asset classes plummet, the others would somehow “hard carry” up for the team.

 

Thus, the above example serves as an important lesson on diversification; the act of not putting all of one’s eggs into a basket. Though the gains may not be as much as placing all into one asset class (especially equities), but at least the risks and losses can be mitigated via diversifying. 

 

1 – The Bedokian Portfolio (2^nd Ed), p71

“Even Monkeys Do Fall From Trees”

When I took up a Japanese language course during my younger days, our teacher taught us a proverb that goes like this:

猿も木から落ちる (saru mo kikara ochiru)

This roughly translates as:

“Even monkeys do fall from trees”

The proverb describes that monkeys, who are adept in climbing trees, do fall down sometimes. Applying in the real world, it means no matter how skilled an individual is, he/she would fail at some of the time.

Picture generated by Meta AI

I had brought this up after reading about Allan Lichtman, who together with a Russian geophysicist, developed a 13-point checklist in predicting the next United States (U.S.) president, known as “The Keys to the White House”. Applied throughout history from 1860 to 2020, out of 41 elections, the checklist predicted 38 correctly; that is an astounding 92.7% accuracy. Since the prediction tool was created in 1981, it came true nine out of ten times up till 2020.

Due to its high degree of accuracy, Lichtman was interviewed many times by the media on the 2024 election, and he stated constantly that the Democrats were going to win the presidency. Alas, this time marked the fourth failure of his prediction, which, however, made things worse with some brickbats being hurled at him. The effects of recency bias, prevalence of social media and the divisive U.S. political climate attributed to his criticism.

Bringing this to the investment front, there are many stories (known and minor) of famous investors and fund managers making the wrong calls. Warren Buffett admitted that he, too, made investment mistakes, such as buying ConocoPhillips when oil prices were at a high, and not buying Amazon and Google, to name a few¹. Long Term Capital Management, a hedge fund founded in 1994 with renowned traders and economists helming it, failed just four years later due to its use of leverage, the Asian Financial Crisis of 1997 and the Russian financial crisis of 1998². In a more recent case, Bill Ackman of hedge fund firm Pershing Square Capital Management sold Netflix at a loss in Apr 2022³, only to become a wonderful growth stock after recovering from 2023 onwards.

These instances can be considered as afterthoughts, or hindsight bias as some may put it, but this is not the important point.

The takeaway from this post is that, no matter how good a person is in his/her calls for a certain outcome, there is a high probability of things not panning out as it would. Whether the potential results were calculated based on hard facts and data, there will be a curveball being thrown in and mess up everything; in other words, the unknown-unknown factors come in and derail the whole works. While it is good to hear from these greats and geniuses, one has to know that they are still human after all (or monkeys concerning tree climbing).

Disclosure:

The Bedokian is invested in Google.

Related post:

Respect, Not Idolize

Disclaimer

1 – Woods, Laura. Warren Buffett’s failures: 15 investing mistakes he regrets. 15 Dec 2017. https://www.cnbc.com/2017/12/15/warren-buffetts-failures-15-investing-mistakes-he-regrets.html (accessed 20 Jan 2025)

2 – Hayes, Adam. What Was Long-Term Capital Management (LTCM) and What Happened? Investopedia. 19 Dec 2023. https://www.investopedia.com/terms/l/longtermcapital.asp (accessed 20 Jan 2025)

3 – Herbst-Bayliss, Svea. Ackman gives up on Netflix, taking $400 million loss as shares tumble. Reuters. 21 Apr 2022. https://www.reuters.com/technology/ackmans-pershing-square-sells-netflix-investments-2022-04-20/ (accessed 20 Jan 2025)

Going Nuclear

With the advent of artificial intelligence (AI) and its related uses, potential and current, ranging from natural language processing to pictorial generation (like the one used for this post), processing power overall is increasing exponentially, and with it, the need for more energy consumption. The majority of the Magnificent 7 companies, true to their description, were planning to invest in data centres, lots of them, to fuel their AI applications and projects, literally and figuratively. 

On the literal sense, to feed the power guzzler required of AI generation, and the current trend of weaning away from traditional fossil fuels, nuclear is the next best way to go. The large technological companies are positioning themselves for this old-new power source, either by reviving old plants, positioning their data centres near existing ones, or developing breakthrough nuclear tech (i.e., fusion), or a combination of the choices.

Picture generated by Meta AI

Investment Opportunities

With an estimated annual growth of 27.67% between 2025 and 2030, the global AI market size is expected to grow to almost USD 830 billion by the end of the said period¹. Barring the factor of improved power efficiency within the AI hardware and software themselves, this meant a huge boost in nuclear energy and whatever that is associated with it.

There are a few investment opportunities stemming from here, ranging from investing in the raw material that powers nuclear fission energy itself, that is uranium, along with the mining companies, to operators of nuclear power plants and their suppliers. For retail investors, there are a few ways to get exposure to nuclear counters (not radiation) such as via exchange traded funds (ETFs). In the U.S. markets, there are a few ETFs that one can get a toehold on, such as Global X Uranium ETF (NYSEARCA: URA) which has a majority of mining companies and producers in its holdings, or VanEck Uranium and Nuclear ETF (NYSEARCA: NLR) that has power companies that utilises nuclear energy. Or, if one is confident enough to do stock picking, conduct fundamental analysis into the individual companies that make up the mentioned ETFs and buy into them directly.

Investing into nuclear energy is an example of what is known as thematic investing. For AI investing, there are other sectors and themes that one can go into, such as data centre real estate investment trusts, the Magnificent 7 stocks themselves and the “shovels and barrels” that push the AI revolution (Nvidia anyone?). A thorough understanding of one’s investment philosophy, principles and methodology is needed before considering of whether these counters are useful for his/her portfolio.

Disclosure

The Bedokian is invested in Nvidia, and not invested in URA and NLR.

Related post:

Eh Aye…

Disclaimer

1 – Artificial Intelligence – Worldwide Market Size. Statista. Mar 2024. https://www.statista.com/outlook/tmo/artificial-intelligence/worldwide#market-size (accessed 18 Jan 2025)

“A Broken Clock Is Correct Twice A Day”

You may have heard of the above, and it is typically applied to people whose predictions and forecasts do come true, only after a long period.

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This holds true, too, in the world of investing and trading, specifically people who are in the business (or hobby) of providing market and stock analyses and predictions. As the combinations of future occurrences are infinite, there are times where things do fall in place at certain points of time.

And true to the broken clock analogy, time is the main variable, and with it, everyone’s postulated scenarios will happen sooner (maybe the next day) or later (perhaps in a million years from now). It is precisely this explanation that, if plausible enough to me, I do not diss anyone’s stated outcomes.

So, if you have been reading permabears’ opinions about an imminent market crash, or a certain bank stock will rise to a certain price that looked far-fetched at present; who knows, it may come to fruition someday, and it becomes a question of “when” and not “if”.

As I have often stated, predictions up to the “T” (the right happening at the right moment) is very difficult, and all we could do was to do estimated guesses i.e., “guesstimate” with the available data. Even so, different people would have a variety of interpretations of the data, and given their varied personalities and outlooks, it would give us a huge range of results.

Therefore, echoing my ex-colleague’s answer when asked about whether something may occur, his reply would contain the following:

“Only time will tell”.