It’s certainly been “exciting”; bull markets, bear markets, the illusion of the “Age of Moderation”, the “GFC”, the pathetic recovery, the European crisis, mega acquisitions, spectacular bankruptcies, the commodity super-cycle, many wars, natural disasters, wayward central bankers and useless politicians. It has always paid to expect the unexpected. Here are some of the key lessons that I have learnt over the last ten years.
Don’t try doing things you don’t understand
On my first day at Psigma I was asked to put together a deal ticket for our clients. Having expressed my ability to use various software programmes – clearly a lie – I was supposed to be au-fait with “Excel”. In fact, the only time I had used a computer was to write my magnum opus dissertation “The Homeric Hero and Heroism Through the Ages” – copies available on request.
My creative “ability” proved pointless in creating this deal ticket. I typed in the various numbers for the trades in to this marvellous spreadsheet, got out my calculator and started to add them up.
One of our operations guys looked at me in bewilderment and questioned what I was doing. In a state of disbelief, he showed me this “sum” button and started me down a very short career as an investment assistant.
To keep the firm safe I was moved away from spreadsheets and on to the investment strategy team soon after, but I recognised from that day that you should never attempt to do something you don’t understand.
In the investment world this has kept us out of life settlements, complicated hedge funds, Russian equities, most structured products and anything opaque.
The past is the past; the past is not the prologue
2008 was the first time I learnt that investment wasn’t easy.
Having enjoyed the halcyon days during the 2003-07 bull market, I was beginning to think that I had lucked out in my career choice; this investment lark was easy. How wrong I was.
Performance of indices in 2008
Source: FE Analytics
2008 was a vital period in my investment education, not least because it dawned upon me that experience could actually be a burden to investors. Using history as a guide to the future was extremely dangerous.
Interest rate cuts and liquidity alone would not be enough to save the banking sector and asset markets, as many old heads suggested.
For those unburdened with years in financial markets, particularly those with a degree in collapsing classical empires, it was easier to plot a course through the treacherous conditions. The past is the past, the past is not prologue, has become a favourite investment motif.
The hardest decisions are often the most rewarding
Having assumed the poisoned chalice that was the role of CIO of Psigma in the depths of the Bear Market of 2008, I was keen to make an early impression.
Having positioned our portfolios extremely cautiously in the early summer months of 2008, my team and I felt it was time to start adding risk back, hoping to benefit from the traditional “Santa Rally” and a likely inflection point in equity markets.
We decided to buy the fund that had the highest bouncebackability and plumped for River & Mercantile’s UK Equity Recovery fund. For a few weeks at the end of 2008 I was a hero. By early February I was back to being a zero.
By the time the markets started rebounding in early March I was clearing my desk. Then the sky cleared and markets boomed in an ultimate “dash for trash” environment.
Performance of fund vs sector and index in 2009
Source: FE Analytics
I was brought back in from the window ledge just in time to see the fund double in a matter of months.
It’s the liquidity, stupid
There is little doubt in my mind that the vital factor for short term investment returns is liquidity.
The last few years have taught us that this is the case, as markets have gained despite corporate profits stagnating, particularly in Europe. Even today we see European equities going up on the basis that economic weakness will lead to more QE.
It is also highly debatable whether liquidity is the pre-eminent factor over starting valuation for long term investment returns. As we look forward we have become more cautious on the US and the UK as it appears clear that the only way liquidity conditions can go is tighter.
The exception is Japan, where we feel convinced that Kuroda-san will keep the taps flowing for some time to come. With Japanese equities cheap and policy ultra-loose, the outlook for Japanese equities is bright.
Don’t follow the crowd
If I had to describe my investment style in a couple of words it would be “aspirating contrarian”.
My favourite investment lesson of the last decade is to do the opposite of what others are saying. This isn’t just because I am an argumentative fool, but because history has taught that taking anti-consensus views will bring the greatest returns.
This has meant that we have often been early in to new trades, such as Japan in 2011 and Europe in early 2012, but ultimately they have been fruitful. Our latest contrarian bets are in peripheral European banks and Chinese growth names.
If I had to pick one as a favoured play it would be China.
Be able to get your money back
Another lesson could easily be that the industry is too quick to forget the mistakes of the past.
Certainly we think that fund liquidity is something that investors should focus on, particularly in corporate credit markets. We saw how a change in sentiment can impact illiquid asset classes such as commercial property and hedge fund of funds in 2008, assets that we mostly avoid on liquidity fears.
Liquidity conditions in corporate credit markets have deteriorated over the last few years as market-makers have scaled down their exposure, under the orders of compliance officers and risk managers.
If sentiment changes quickly towards high yield credit then some of the big managers could suffer liquidity issues and gates could be raised.
Clients will likely forgive periods of poor performance, but would not welcome being unable to get their hands on their assets when they want to.
Politicians are the greatest risk to markets
Over the last decade it has been central bankers that did the most damage to markets. The irresponsible actions of Messrs Greenspan, Bernanke and our own King allowed a bubble to build and burst violently.
The greatest mistake in the last ten years was when the lunatic Trichet raised European interest rates in the Autumn of 2008, fighting an inflation scare that was non-existent. Some central bankers have been able to partially redeem themselves with their post-crisis actions, but we fear that their policies have delayed the pain needed to cleanse the developed world and stored a crisis up for another day.
However, it is the politicians that worry us most. Markets have become much more political in the last decade, with an ever-growing negative influence.
Asset markets and certain companies have become political footballs and sadly it seems to be a trend that is worsening.
