Looking back to look forward

Monday, Jan 9th 2023

Commentary

2022 was a difficult year. 

We saw what we believe was a sea change in the investing environment. It went from a decade of sunny skies to a much more challenging set of dynamics. And I believe it’s here to stay for the foreseeable future. Our goal is to grow your wealth regardless of the weather, so let’s talk through 1) how we got here 2) how we responded 3) where we missed 4) the changes we’ve made to our process and offerings and 5) the path forward. 

How we got here:

My co-CEO Joe and I met in 2008, the week before Lehman Brothers collapsed. We’ve seen the markets when it was really, really dark outside. And we’ve seen the investing landscape over the last ten years when it was really, really sunny. It was a decade of high returns especially in equity markets. 

After Lehman and the financial crisis, the Fed kept rates low – near zero percent. This meant it was cheap to borrow. It was easy to get a mortgage. Asset prices rose, along with confidence in the markets. There was also a shift to riskier assets. Investors moved from bonds into higher growth asset classes like stocks and venture capital, riding high on their confidence. Then COVID-19 hit, which at first was a global crisis, but it then ironically led to even more economic stimulus in an environment that was already quite sunny, contributing to the rapid inflation we see today. A sunny economic environment got too sunny - it overheated. And so a domino effect began, leading to a transformational sea change. 

To fight this inflation, the Fed made an aggressive U-turn from the longest period of low-interest rates to hiking more aggressively than it has in four decades. Gone are low rates, easy access to the capital that drives spending and growth, and stocks that only go up.  

So how did we at Titan respond to this investing environment:

We made meaningful changes in our portfolios in late 2021 and early 2022, but they were not as quick or as deep as they should have been, with the benefit of hindsight.

In a period of months, what we did do was the following: 

  • Reduced our exposure to unprofitable tech and invested that capital into companies we believed were well-positioned for the new inflationary environment – in sectors like energy

  • Raised strategic cash in our equity strategies and played defense starting in January 2022 by fully activating hedges which effectively short the market 

  • In Crypto we reduced alt coin exposure and concentrated in blue-chip crypto assets, i.e., Bitcoin

  • And finally, we pulled forward our plans to launch income-oriented products for our clients in real estate and credit so they could have even more diversified portfolios with less correlated holdings

Our misses

Despite these moves, Titan strategies were not immune, and even with a long-term mindset, seeing losses was painful. Here’s a few examples of where we fell short in 2022:

  • We initiated a few investments where our theses broke quickly, and we sold the positions. In a perfect world, we’d hold each position forever. However, markets and investing are imperfect. We have to understand when we’re wrong and cut ties quickly.

  • As detailed in our Terra/Luna post-mortem below, we under-appreciated the technical risks and stress scenarios that would be imposed on the crypto market during periods of high volatility. 

Changes to our investment process

We learned a lot in 2022, and I’m optimistic about the changes we made to our own investment process as a result. For example, we implemented new risk management frameworks around stop-losses and factor exposures, we restructured our investment team to have clearer areas of focus and accountability, brought on top-tier partners to open up the world of alternative investing, and a lot more.

Investing is a life-long game of learning, and I’m looking forward to getting into 2023 with the lessons we learned in 2022. 

The path forward

Now in light of this sea change, this transformation in the markets, what does this mean for 2023? 

Some good news and some bad news.

Good news: we see room for cautious optimism: 

  • The S&P 500 is down nearly 20% this year, and tech is down a hair over 30%. This suggests we’re much closer to the bottom. If we do indeed fall into a tough recession, there could be more room to the downside. The truth is, nobody knows, so it’s rarely worth trying to time the bottom.

  • Inflation appears to be slowing down, although it remains well above historical levels and we need more data points to confirm the slowdown is persistent enough

  • And the market has finally digested a lot of the extraneous events in the world (conflict, supply chains). While recent developments have been encouraging, if we’ve learned anything in the last three years, it’s that the world can be unpredictable.

Bad news: the recovery won’t be as fast as we’d all like. For comparison, we likely will not see a sharp rebound like we did in COVID (or what’s called a V-shaped recovery). This choppier environment is likely the new regime, at least in the equity markets, for a while. 

Alrighty, let’s zoom out. These are the facts on the table - cautious optimism, but a bumpy recovery. The goal is to power your wealth regardless of the regime. Your wealth should not stop. What’s the best way to do this? Think about your money in three buckets: foundations, income and growth.

  1. Foundations. First, bonds and income-oriented products are back. You may have received many different emails from companies touting their 3-4% cash rates. This is a relatively high interest rate environment vs. the past 10 years, and you should take advantage of this. To put this in context, historically the stock market average did high single digit annualized returns, but you had to take on risk. Now you can effectively get halfway there, in a much lower risk way. Stay tuned for an exciting update coming from Titan on this front – to help solve the Foundations bucket for you. 

  2. Income: Real Estate aims to provide consistent income and the long-term upside of hard assets; Credit has historically shined in high-interest rate environments and our partners are sourcing opportunities to invest in the debt of high-quality companies at yields last seen in 2009. 

  3. Growth. To enhance your wealth with higher possible growth, on top of this foundation, you should be playing multiple notes. Your front burners should continue to be Big Tech, energy, real estate & credit. Big Tech is currently out of favor, with valuations we think are fairly attractive for some of the best companies in the world with robust free cash flow support today. Energy is somewhat in favor, but valuations remain attractive here too, so it should represent a slice. All Titan equity strategies have meaningful energy exposure, and Flagship remains invested in Big Tech today. Venture & Crypto are your longest term investments so think of them as back burners. They both had tough years, but we have high conviction that technology solves problems over the long-term and the power law should benefit an allocation here even today. 

So when you look at this picture of your wealth, you can see strong foundations, plus the potential for consistent income and strong upside. You have a fleet of both lower-risk and growth investments designed to take advantage of the new regime.

Most people are going to read WSJ headlines and think they should pause growing their wealth. We get it. In stormy weather it’s hard to keep thinking long-term, but we think this is absolutely wrong. The key is adapting your wealth strategy to the environment, so your wealth can be in the best position to grow regardless of the type of sea. In our opinion, we see an opportunity for you to stay foundationally sturdy but also see possible upside. Reach out if you have any questions - we’ll be working hard for you.

Clay Gardner
Titan Co-CEO

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