Things We Won’t Do as a Portfolio Manager

In the world of behavioral finance, there is a well-documented phenomenon known as loss aversion. Nobel Prize-winning psychologists Daniel Kahneman and Amos Tversky found that the pain of a loss is psychologically twice as powerful as the joy of an equivalent gain. Statistically, most investors require at least a 2-to-1 gain to offset the emotional trauma of a loss. 

Several months ago, I spoke with a former Canadian bank CEO who now spends his time investing for himself. He summarized his investment philosophy by saying, “I try only to avoid the downside. That way, as long as I’m right, I keep all the upside.” We take that same approach for our clients. 

While we often discuss companies we favour, it’s equally important to discuss the things we refuse to touch.

Leverage (Reason: forced selling risk)

We don’t borrow money to invest for our clients. Using $100,000 of your own money and borrowing $200,000 means a drop of just one-third in the market could wipe out everything you’ve invested. We avoid putting our clients in that kind of risk.

Short-Selling (Reason: unlimited loss risk)

Short-selling is basically betting that a stock will go down. Unlike buying a stock, where the most you can lose is what you invested, short-selling can lead to unlimited losses because a stock’s price can keep going up with no limit.

Cryptocurrency (Reason: no intrinsic value)

Bitcoin trades on belief rather than fundamentals. It produces no cash flows—an essential input for valuing any asset—and offers no underlying business or productive activity. Prices move based on what the next buyer is willing to pay, not on intrinsic value. For us, that isn’t investing; it’s speculation.

Over-Concentration (Reason: risk of permanent loss)

One of the most common mistakes we see when clients move their money from another firm is putting too much into a single stock or sector. This trap can affect anyone, though it’s especially common for younger investors. Building a diversified portfolio takes time and research, which is where we help. We make sure your investments are spread out so that no single “hot” idea can put your portfolio at risk.

Options (Reason: time decay risk)

Options can boost returns, but they come with a built-in deadline. When you buy a great company, time is your friend; when you buy an option, time is your enemy. An option can become worthless overnight if the market doesn’t move in your favor by a specific date and time. While options can be used carefully to manage risk, we prefer to reduce risk by spreading investments across many stocks and sectors so that no single company can sink the portfolio.

Sitting on Cash (Reason: loss from a foregone opportunity)

Finally, we don’t sit on the sidelines waiting for a market crash. Over the past 40 years, the S&P 500 has been up about three-quarters of the time. We stay invested, focus on high-quality companies, and avoid mistakes that can cause permanent losses. Holding cash may feel safe, but inflation slowly erodes its value. By staying in the market and spreading our investments, our clients can participate in long-term growth (even in years full of uncertainty like 2025).

If you are interested in having your portfolio reviewed, please contact us at info@schneiderpollock.com or give us a call at 416-646-0756. 

-written by Jeff Pollock