Secular Trend Investing Demands as Much from its Investors as it offers.

“Don’t End Up in the Washing Machine”.

This cryptic counsel, offered up by an impossibly lean guide heading up the overnighter to Punta San Lorenzo, Ecuador, differs from vacation hotel surf instruction tips, issued at beginner surf lessons taken at many oceanfront locales. The “washing machine” references underwater circular cross currents of a breaking wave; if a surfer gets caught in such a break, they are generally tossed around like a rag doll underwater, which can lead to a perilous shore rescue at the minimum, a grievous injury at the margins or potentially even death by asphyxiation.

Our guide tossed out the washing machine comment while simultaneously appraising the source of the inquiry. Had the tour operator erred in permitting the subject to accompany a seasoned group to a challenging reef break? Experienced sorts don’t ask for tips and the bigger waves are extremely unforgiving of noobs. Had a “Barney” (slang for an inexperienced surfer or worse yet, an experienced surfer lacking some important skills) somehow slipped into the trip; a trek that would be highlighted by a challenging reef break only accessible by boat, miles offshore the point break?

“Look Honey, I’m Surfing!”

Surf lessons are standard resort offerings at most oceanfront locations. In Kaanapali Hawaii, pale tourists amble down to the beach daily, umbrella festooned drink in hand, hotel photographer in tow. A “resort surfing 101” lesson plan largely consists of jumping up and down on a board firmly cemented on the sand.

Eventually, the Barneys paddle onto “ankle busters” (baby waves) near the shore and are awarded a voucher for a photo-shopped magazine cover plus a souvenir board shirt, bedecked with a monogram noting the year they stayed upright, for at least a few feet. The physical act of surfing has been accomplished; most ride the waves just that one time. Yet, for the purpose of holiday social media posts, only superficial differences separate somebody completing the one hour course, to Italo Ferreira. On the return flight, the anecdote: “I stood up on a board” transmogrifies into “I barreled a SICK A-frame, you should have seen it”.

“Interest Differs from Aptitude. Aptitude Requires Training. Training Instills Proficiency”.

In any sport, any discipline, any profession; experience and training makes all the difference. Skillsets both learned and practised; that is what separates those with raw ability from those with true competence. Bravado is not a substitute for skill, fearlessness is synonymous with foolhardiness.

Yet, counterintuitively, amped Barneys are occasionally spotted bobbing, like sea otters, on waters only surfed by the most experienced. Sometimes, the misplaced Barney appearance arises due to a technicality or oversight, one that enables an Eddie the Eagle or the Jamaican bob-sleigh team to qualify for Olympic competition. Other times, it is entirely due to persistence, as was the case for Elizabeth Swaney, whose life’s dream was to compete in an Olympic event. She selected freestyle skiing after determining that in order for to qualify for a brand new event, Elizabeth only needed to attend a certain of qualifying events and NOT crash, all the while participating under the flag of a nation with a guaranteed mandate to send at least one representative to the Olympics. Swaney diligently attended every qualifier, painstakingly descended each hill without executing even the least challenging of tricks. She gamed the system. Her Olympic credentials were achieved via a certificate of attendance.

Elizabeth Swaney is not a one-off; Pita Tuafatofua of Tonga, an oft injured taekwondo athlete, fulfilled his Olympic dream by taking up cross country skiing after learning the region of Oceana (a bunch of tropical nations) was entitled to send a ski representative to the Winter Olympics and decided to give it a go. He finished 114th in the event, beating a Mexican cross country skier that utilized the same regional qualification loophole.

A reasonable and careful person generally lives their existence practicing the principle: “just because I can, doesn’t mean that I should” . Others live their lives following the principle: “if nobody is gonna stop me, then I’m doing it!”. It is the latter that you might, inexplicably, encounter, miles off-shore, at Punta San Lorenzo.

“Dad, Are We There Yet, I’m Tired!”

Shore break surfing is at least 80% paddling, so much so that you are generally “noodled” (arms and shoulders are exhausted) after just a few decent waves. In documentary series about surfing or surf movies, the scene invariably commences as the surfer catches the wave. Occasionally, the scene opens up mid-ocean, where several surfers engage in some good natured banter immediately prior to assaulting the wave of the day. I have yet to watch a surfing piece detail the arduous paddling, sometimes for hours in a day, required to get to the right shore break, the paddling over/through a multitude of waves in efforts to try and catch a good wave, the sprint type tempo needed to catch the wave you want to surf, only to, more often than not, miss.

More recently, surfers have adopted a “tow-in”; the use of a jet ski to tow a surfer to the top of the wave. Tow-ins were originally employed by experienced surfers who wanted to surf the waves higher than 30 feet, but who could not paddle fast enough by hand to catch the wave. Tow-ins have revolutionized the sport of surfing, but have created an unintended effect; surfers whose fitness is lacking and are unable to paddle to even medium sized waves can now just hire a jet-ski to tow them wherever they want to go. Consequently, Barneys are now able to give killer waves a go, at least once, even if they are completely unfit to ride that wave.

“I Just Happened to be in the Right Place, at the Right Time”, said no competent surfer, ever.

Lake Como, Italy is an idyllic tourist trap, but it is definitely not known for board surfing. You could put out a board on that lake, maybe even market the destination to friends who might float around with you for years, decades, centuries, but unless a meteor hits, a surf quality wave is virtually impossible to envision. Serious surfers must travel globally to where the waves are; whether that is in far flung regions of the Americas, Asia, coastal Africa or Australia. Once there, they evaluate the coasts, look for reef breaks, check water depth; devour weather reports for wind forecasts and pressure systems. Time-consuming legwork is undertaken to determine the most suitable regions for the presence of the biggest waves and the conditions that are most favorable to produce the best waves to tackle. Surfers train to identify differences in swell lines so as to maximize their likelihood of catching at least one decent wave that they are capable of surfing. Surfing involves planning and planning factors out luck. The best surfers choose to be exactly where they are, at precisely the time of their choosing.

Big Wave Surfing Requires Mastery of Many Skills.

A beginning surfer requires only the capability to stand up on a board for a short duration. Tiny waves lack velocity and volume; fitness isn’t even essential to the initial practice of surfing. However, as the size of a wave increases, the velocity, pitch and fetch of the wave action also increases. At that point, fitness, balance and technical competence come into play; proficiency must keep pace with wave height and speed.

“Pay Your Tax in 4 Easy Installments!”

Surfing tour guides often appraise the credentials of their clientele via an ocular pat down, an occasionally indiscrete evaluation of the visible scars on a surfer, otherwise known as “reef taxes”. My first and most first significant reef tax was levied at Playa Encuentro, DR almost 30 years ago. Multiple stitches directly below my kneecap and a chunk of bone completely shorn off; my limp pronounced for more than a year, a section of my tibia now substrate for a developing Caribbean atoll and my leg still somewhat tender to the touch. Other tax installments have been assessed over time; every bloody foray into the sea was sufficiently memorable that I will not willingly repeat those same mistakes. And mistakes they were, not bad luck or accidents. Some oversights were based upon a lack of preparedness. Other blunders resulted from insufficient skills for the task. By far, the most critical gaffes were entirely due to disrespect for the force of massive volumes of water moving at a high rate of velocity. Barneys are routinely overconfident. Overconfidence gets wrung out of one’s system after enough painful wipeouts.

The Right Equipment is Essential to Surfing a Larger Wave.

99% of surf boards on the planet are mass produced “popouts” made from polystyrene. Popouts are offered in predetermined sizes to accommodate the widest possible range of surfers. They provide newer or occasional surfers with the ability to ride some waves for a low price but do not stand up to the larger, more powerful waves. Consequently, surfers that ride the mass market boards are constrained; they can only surf the waves that the boards are capable of riding without breaking.

World class surfers, or those that intend to be a world class surfer, typically own several customized boards built to suit the task at hand. They are constructed with a denser foam core than popouts. Stringers are added throughout the process to increase durability. The board is shaped by hand to suit the needs and requirements of the rider and finished by hand. Finally, the board is laminated multiple times to add even more tensile strength. All expert surfers utilize custom boards; it isn’t a vanity issue, it is an absolute, entirely based upon the need for strength and durability.

Those that intend to surf the “big” waves, own highly customized surfboards known as “guns”. These boards range from 6-10 feet in length, have multiple fins, narrow tips and feature additional strength points, added during the board creation, to handle the stress of the largest waves.

Big Wave surfing Isn’t an Entirely Solo Event. A Small Team is Required to Assault the Large Swells.

Most surfers learn to surf on ankle busters and eventually move up to “party waves”; they surf with a bunch of friends or when heading to a somewhat unfamiliar spot, they eye up where surfers congregate and paddle to that location. That’s fine for most. However, if your objective is to tackle the big waves, you WILL NOT be surfing with buddies.

Big wave surfing comprises a tightly knit team of participants consisting of a spotter, a tow-in, and, of course, the surfer. The spotter remains on shore and is posted at a vantage point that enables the team to differentiate the waves within a swell line. Your spotter is a vital teammate; the surfer, while on the water, is generally unable to see past the wave immediately in their line of sight and cannot determine the optimal wave for their capabilities, or, if they are looking to surf the largest wave possible, which one that may be in the swell line. The tow-in driver is equally important while on the water; a jet-ski driver tows the surfer through the swell line, takes them to the chosen wave and powers them to the top. Any serious big wave surfer is largely helpless without these allies.

Graduation from Party Waves Means the End of the Party.

If you aren’t fit enough to get to the wave and on it; if you were undisciplined to the point that you exhausted yourself surfing a bunch of smaller waves and were too noodled to ride the bigger wave when it appeared; then it is highly likely your companions are also in the same situation; by definition, that’s a peer group. The bigger the wave, the more challenging it becomes to surf. True big wave surfing, while employing a team, remains a solo experience for the actual ride. Committed surfers operate in their own space without the relative safety of many like-minded buddies, without their support and commiseration.

Expert Surfers Master one Technique Largely Deemed an Afterthought by Novices.

It’s a given that surfers will fall off their board more than they will ride it. In the beginning, when newbies ride the baby waves, wipeouts are more a source of frustration and embarrassment, than an actual danger. As the degree of wave difficulty increases, as volume of water produces more potential displacement, real elements of physical peril are introduced to the act of surfing. Experienced surfers become proficient in learning how to “bail” from a wave. They master the act of jumping off their board to avoid an imminent wipeout. Bailing involves jumping as far away, in the opposite path of the board, and landing on your behind, rather than face down or head first. Coincidental with learning to bail, learning the least risky way to wipeout is also taught. Wipe-out techniques focus upon damage mitigation. Hitting a solid mass of water at 30+ plus km per hour is akin to hitting the ground at that speed. Furthermore, waves have the power to flatten buildings with pressure; water weight and volumes that can knock all the oxygen from a surfer’s lungs. A large wave can fracture ones spine as easily we can snap a toothpick. There is no safe way to bail from a large wave, nor is there a foolproof way of protecting yourself in a wipeout; all a surfer can do is to attempt to reduce damage in the aftermath. There is typically only about a 20 second separation between waves in a swell, one needs to get to the surface, uninjured, after a wipeout, inhale quickly before the next wave catches you and assess how to get to shore without further injury.

“NEVER Shoulder Check the Wave.”

Surfers are schooled to maintain balance at all times during their surf. The physical action of looking behind at a wave while on a board requires a quick change in body position; shoulders shift when shoulder checking, which impacts ones balance and can readily lead to a wipeout. To minimize the risk of a wipeout, instructors advise newer surfers to check the temptation to look at the wave behind them once the ride has begun; not only is it pointless, it adds an element of danger based, upon the shift in balance

The Least Risky Time to Bail on a Wave is Right at the Beginning.

Experienced surfers are trained to identify if they have misjudged a wave at the start of their ride. A brief window of time exists at the outset to bail, before the crest prevents escape. But, once that crest is firmly behind the surfer, the window for a relatively safe escape slams shut; the ride must be completed, one way or another.

In Many Aspects, Surfing Secular Investment Waves is Pretty Much the Same as Surfing Ocean Waves.

Predictable uniform patterns exist within oceanic swell lines. A typical line features one wave significantly larger than the rest, followed by several that are roughly half that size and the remainder much smaller. The overall height of the waves within each swell is almost entirely dependent upon prevailing wind speed, wind duration, pressure systems in the region and the fetch (the size of the area impacted by the wind).

Those same properties apply perfectly to equity trends. Equities are grouped into sectors and each sector generally moves in the same direction. A sector and its directional movement represent the equity equivalent of an oceanic swell line. Investment sectors are pushed in a certain direction by external factors. While all investments within a secular swell will move in the same direction, one equity in each sector will typically generate a much higher return than the remainder of the swell. Then, there will be a couple of investments in the swell that provide a return roughly half that of the highest wave. Finally, the remainder of that swell line will feature a number of smaller waves providing some return, not nearly to the scale of the highest wave.

In equities, both weak secular trends and strong secular trends can be noted; those trends are driven by external developments. The strength or weaknesses of those external factors determine the fetch, the duration and the height of the investment secular waves. The greater the external forces producing the equity swell, the stronger the overall swell line system.

An equity surfer needs to choose which wave they intend to surf, in that sector swell. While all surfers might aspire to ride the biggest wave in that swell line, from an efficiency perspective, one should only attempt to surf the waves that they are most capable of surfing. If you surf waves beyond your level of proficiency, you will fall off too frequently and get noodled too regularly to achieve the optimal result. One can always surf waves below one’s capability, but unless you are an extremely lucky Barney, your capital risk rises if you attempt to ride the biggest wave in a powerful sector.

A Determination That you are out of Your Depth in any Secular Investment Swell Line is Easy; the Typical Surfer Reaction is an Attempt to Bail, Mid-surf.

“I had no idea that the investment was this volatile, I’m getting out”, “I cannot handle this day to day price action”; these complaints are regularly voiced by investors, not on the way up, but on the way down. It represents a deflection away from the investor and onto the equity itself. The problem lies not in the investment wave being surfed, but rather, the surfer. The wave does what it does whether you are on it, or are, more likely, merely observing it at a distance and commenting on the price action. Rather, the inability to ride a wave represents a mismatch between the skills of the surfer vs the skillset required to competently participate in that investment. And, the more powerful the secular wave, the greater the volatility and the more exaggerated the sector moves will be. By way of example, in December 1999, Amazon sold for as much as $106.69 US per share. In December 2000, Amazon shares sold for $15.56 US, a one year decline of 85%. That wasn’t the worst of it. The following year, in 2001, Amazon declined from that $15.56 per share to a low of $5.97 per share, an additional drop of 61% in that year.

Only the most disciplined of the Amazon surfers proved fit enough to paddle through that pain, maintain their balance on the steep descent and do so without breaking their board. Yet, If one looks carefully into the quarter over quarter or year over year price action of EVERY multiple bagger that is now the stuff of legends; Barneys are shaken out, sometimes repeatedly, while tentatively trying to ride the exact wave that produces billions in profits for the expert surfers.

Do you Possess the Skillset to Ride the Biggest Secular Investment Waves?

Both hard skills and soft skills are required. The hard skills represent your in-depth knowledge of the investment you hold, its competitors (should they exist) and the particular secular trends you are attempting to surf. Soft skills represent your ability to gauge the strength of the winds, your level of commitment, and your determination to sidestep herd pressure (peers always attempt to persuade you to stick with them on the party waves). If you lack both hard skills and soft skills, you will forever be caught paddling aimlessly, attempting to ride waves beyond your capability and then attempting to bail out, mid ride, on what might be the most powerful trends of our time.

Just as it is largely impossible for even the most skilled surfers to bail out on a large oceanic wave without incurring physical risk, so too is it largely impossible for an equity investor to bail out, mid-ride, from a consequential secular trend, without incurring significant capital risk.

Is Your Board Suited to Ride the big Waves?

Much of the investment industry has gravitated towards ETF, passive indexes and mass market package products. They are the equity equivalent of the mass market “popout” boards. At best, you’ll have some fun on the party waves, but don’t seriously think about heading out to the big surf. Your investment account is your surfboard and you will need to have a custom account; mass market products have no intention of tackling the big surf.

You’ll Need to Consider the Strengths of your Team if you Want to Succeed on big Waves.

World class surfers don’t find the waves to surf; they let others find those waves on their behalf. Big wave surfers don’t paddle through entire swell lines, expending energy that should be devoted towards the ride itself; they utilize a tow-in. Top-shelf surfers specialize and delegate. They train constantly, practice their craft regularly and endeavor to improve on each outing, while simultaneously outsourcing necessary tasks to others.

A Buy-Hold Approach to Secular Trend Investing Sounds Exceedingly Simple. It is not.

Buy-hold has been marketed to the public in the context of a balanced equity account for almost a century. In comparison to secular trend investing, this is analogous to maintaining your balance while standing on a piece of dry land. Secular trend investing is anything but balanced; we cast aside any/all equity sectors and investments that are cyclical, defensive or that operate in freely competitive sectors. Attempts to create a type of balance are possible within a portfolio of secular investments, but equity holders need to understand that only placid, tranquil waters do not move and secular investing is all about the speed, extent and potential duration of a trend; stability is merely a relative term in that respect. Ocean balance differs from dry land balance.

Buy-hold demands little of the investor when it comes to unchallenging secular trends or the ankle-busters. Anyone can surf such trends; the rewards to be earned are in line with the risk undertaken. In fact, one can even ride those trends with mass market popout boards such as ETFS and passive equity funds. A commemorative t-shirt will be your reward.

Old-school surfers with some skills, in possession of a pretty good board, are capable of surfing somewhat challenging shore breaks. Secular investment shore breaks are well known, easily researched and readily accessible by DIY and professional investors alike; examples would be Microsoft, Alphabet, Amazon, etc. These equities powered up many decades ago and still have the potential for good returns, but after decades of rolling towards the shore, the power of a wave is greatly diminished as it approaches the beach. The older great secular investments are now the surf equivalent of a shore break. With equities of this nature, one won’t earn the returns of the big stuff, but you can essentially do it yourself.

The challenges with shore breaks lie largely in the one’s ability to wait; as with ocean surfing, 80% of your time involved with shore break secular trends will be tied up by the aimless paddling, waiting for waves to get close enough for you to participate. Your other challenge will be avoiding the social pressure to ride secular “party” waves; these are extremely well covered investment trends, so widely followed by others that you foregoe return in exchange for the feeling of belonging and the illusion of safety. Party waves are still risky; additional risks arise from surfing party waves full of Barneys; Barneys continually lose their board mid-surf, get in your way and pose the risk for collateral damage when they bail or wipeout. Institutional investors hate Barneys and do their best to shoo them away from secular shore breaks; they have a variety of means at their disposal to scare off the less experienced.

New-school big wave secular surfers require top line hard and soft skills, at least one custom board capable of handling the speed and power of that big wave, the capability to travel to the secular reef breaks, wherever they may be and the humility to employ both an investment spotter as well at a tow-in driver. Most importantly, the big wave secular surfer understands, right at the outset, that this type of surfing will demand its fair share of reef taxes. To assume that one can surf these waves, without terrifying wipeouts and occasional injury to one’s equity portfolio is utter folly. Jeff Bezos’ net worth in Amazon declined by a whopping 95%, during the two year period of 1999-2001; who among us is a better secular surfer than Bezos?

If you choose to participate in the potential offered by big-wave secular surfing, understand YOUR position on the team as well as the job description of others. I surf for my own account and thankfully, my soft skills are such that I do not yet have golfer “yips” or gymnast “twisties”.

The professional investment industry talks ad nauseam about “know your client”. More recently, they have brought forth the notion of “know your product” in an effort to further limit individual access to the equities most highly desired by institutions. While DIY investors of all shapes and sizes are presented with arbitrage benefits brought on by ever tightening restrictions upon how we should invest and in what we should select, we still fail, by and large, because we do not take into account our soft skill limitations. For DIYers, “know your client” is unimportant but “know your equity” and “know your limitations” are certainties.

For you, the reader, I am merely a spotter. It is entirely up to you to assess your level of technical proficiency. You will need the account capable of tackling that big wave, wherever it may be. Mass market products won’t do it: Barneys might get lucky once, but when you press your luck, your popout will get smashed into smithereens. Do you understand the mechanics and physics that are essential to evaluating secular wave actions? It is on your shoulders to qualify the strength of your soft skills.

Can you resist the urge to shoulder check your secular investment wave?

It is pointless to look behind you to see how far the wave has already advanced; what IS important is an assessment of where the wave can take you, provided you get on. A shore break will only propel you as far as the shore; a reef break, in comparison, can take you for miles, assuming you possess the fitness and skills to ride it. Are you willing to venture well beyond the beach break, past the sightline of your, former, party wave comrades, to reach that reef break?

Too many surfers are overly “amped” when a sizeable wave is spotted on the horizon; are you fully capable of surfing such a wave and if you have to ask, should you even try?

Those astride their boards, marking time in the water, might observe a significant swell line approaching. The temptation is always to attempt the largest wave in the secular swell (ie; Apple). Apple represents the primary wave in its line but other equities accompany Apple on the journey. If you lack the ability and the determination to successfully ride the primary equity, rest assured, several secondary secular equity investments in the same line, including Foxconn Technologies of Taiwan, the primary contract manufacturer for Apple, are all heading the same way. Ancillary secular investments won’t match the return of Apple but are considerably easier to ride, from a perspective of volatility; the return earned by surfing on Foxconn was still very significant over the years. Finally, there will be a number of tertiary waves in that swell line also benefiting from the trend.

Identification of the secular swell line is everything; at that point, you are afforded the luxury of choice. Less experienced secular investment equity surfers may achieve far more meaningful results with their equity accounts through avoidance of the temptation to jump on, and the greater risk of attempting to bail out, on specific equities mid-ride, through undertaking a measured inspection of the entire swell, rather than fixating on a single wave within that swell. Secondary and tertiary waves, provided that you determine a trend to be both secular and of sufficient power, will still offer a meaningful return to investors over time.

And finally, have you checked the weather? A tailwind can strengthen wave swells. A headwind will, conversely, reduce the velocity of that same wave.

Akaw!