Imagine my delight recently, as I clicked into a Wall Street Journal article and found myself swept into the fascinating world of professional ham sniffing. Yes, ham sniffing. Somehow, this novel career opportunity had alluded my attention at the high school college and career fairs I attended years ago, yet here it was. For those uninitiated with ham sniffing (as I was only days ago) the profession is centered around the olfactory approval of premium Iberian hams in Spain. These are not your typical grocery store variety hams and cost upwards of $100 per pound. Needless to say, a premium Iberian ham was not the centerpiece of the Kiehl family Christmas dinner. The article, on the other hand, was a highlight of my weekend reading.
Despite its absence at the Kiehl’s Christmas dinner, ham remains a traditional Christmas staple around the world. Consequently, the Spanish ham sniffers (or caladors as they’re officially called) have seen their sniffing requirement grow to 800 hams per day over the holidays (talk about living high on the hog). To properly sniff a ham, a probe is poked into the meat and then checked by the calador for a very specific aroma. According the Spanish ham producer Cinco Jotas, the calador is seeking hams that smell “slightly sweet, with wood and nutty notes.”
“Oh, I’m detecting nuttiness,” you may be saying to yourself at this point – but as I read the article further, it occurred to me that a similarity exists between ham sniffing and the prevalent view that financial advisors are “stock pickers.” Just stick a proverbial probe into the stock market and pull out the companies that possess the sweet smell of future success. It sounds easy enough, but there is ample evidence that this is infrequently achieved and even less frequently sustained when examining actively managed funds (funds whose managers actively pick stocks with the goal of outperforming a benchmark).
In contrast, Evenkiehl aims to construct investment portfolios with strategic (long-term) core holdings while allowing a small percentage to be managed tactically based on changing market conditions. Aside from the belief that it would be significantly arrogant to believe we can outperform an index such as the S&P 500 year in and year when professional fund managers can’t even accomplish this consistently, several other principals shape this philosophy.
Dedicating core holdings to index tracking ETFs reduces investment risk for the investor by removing the natural highs and lows of stock picking. Ark Innovation’s ARKK ETF has been in the news quite a bit recently for this exact reason. A darling fund of 2020, this actively managed fund has declined over 20% in 2021 while the S&P 500 has gained almost 30%. Sure, the highs can be thrilling, but if thrills are what you’re after, another dopamine inducing hobby is probably a better option. Long-term investing should elicit excitement levels closer to watching paint dry.
Additionally, strategic allocation allows for better tax efficiency. The constant rotation of stocks within actively managed funds produces capital gains through its buying and selling activity. This could take on even greater significance if the recently discussed plans to raise capital gains taxes moves forward in Washington.
Lastly, this approach correctly removes the inherent emphasis on investment planning (which in many ways has become something of a commodity with the growth in Robo-advisor platforms and a myriad of broker dealer options) and places it on the broader financial planning. When viewing a full financial picture, there are opportunities for financial returns beyond the more easily quantifiable investment returns, which is where financial advisors can truly add value for their clients.
Looking forward to 2022, there are certainly concerns that can be addressed from a tactical standpoint such as inflation, rising interest rates, continued uncertainty surrounding a stubbornly persistent pandemic, and what many feel is an already overvalued market. But when it comes to our portfolio’s strategic core holdings, we’re leaving the ham sniffing to others.
