Survive the investment jungle's bulls, bears, rhinos and black swans

Transcript

0:14: Should we expect more black swans?

Phil Shaw: Well black swan events by their very definition are impossible, virtually impossible to predict. And if you lived your life and your investment principles were solely around avoiding black swan events, you’ll probably lose out on your market return. So, it’s always good to be mindful of left-field events such as an extreme black swan, but from a practical investment perspective, it’s a lot more logical to try and look at market turns and asset classes.


John Haynes: I think we are a little too frightened of black swans and that sort of thing. I think having had two extremely profound financial resets in a decade – the tech reset and the financial crisis – of different natures, but they both effectively caught the world’s investment community napping. 


I actually think that the world has reacted extremely well to the change in political direction and regime that populism has crystallised in Donald Trump and several changes in control in Europe, have demonstrated, I think if we’d had that ten years ago, we’d have had a much more profound reset of our risk appetite and equity markets particularly. 


So, I’m very encouraged that actually our defences against black swans are quite high. We have a system where we are scanning the horizon for them in a way that we hadn’t done for far too long. So, we’re back to normal cycles but with an embedded risk premium that now rightly reflects an uncertain near-term political direction.

2:12: The danger of raw data

Chris Hills: I think that this is where raw data can be dangerous because raw data assumes that the future has the same pattern recognition as the past. And our job is to look at all the possible eventualities and try and say how can we protect, or insulate, mitigate the tail risks at either end of the spectrum – the implausibly bad or the implausibly good – how can we get some exposure to one end, and minimise exposure to the other end.


So there was that famous example where an investment bank strategist said this would be a one in a 5,000-year event, but unfortunately, it occurred three times within two years. And you can’t rely on the past being a perfect guide to the future.


3:12: The big five

Annelise Peers: So, 2008 we all a massive black swan event and now in a way, we keep looking for the black swan behind every tree. I think the fact that we’re all waiting for it means that it probably won’t occur in the near term. I found a recent definition of a black swan: “A highly unlikely event with severe consequences”, but then there are two other animals, other than bulls and bears. There’s the elephant – that is something we talk about but do nothing about, and then there’s the rhino – a highly likely, but ignored event.


So, I do think we’re in a different world, yes you will have the odd black swan event, but the markets are not confined to two more animals, I think we should expand it to five.

4:02: Volatility is here to stay

John Haynes: So, I wouldn’t say we’ve had more black swans and we need to be worried about it. I think we need to be prepared for greater volatility, but that’s just because we’ve had such low volatility for so long, it’s a natural progression to what people should be prepared to have. So, to anyone who owns equities now, who has not enjoyed the experience over the past year where things have got a bit more volatile, I would say to them then you’re not suited to equities, you need to sell your equities and go do something else for a living because this is here to stay.


03:50: The 6ft man

Ryan Friedman:  We have a fascinating engagement with one of the world's best investors in New York and he has a great saying, 'Did you ever hear about the six foot man, the 6 foot tall man who died crossing a river that was five foot deep, on average', what that means ultimately, is that you need to have sufficient powder dry and you cannot be over leveraged that will make you sink [00:04:19] even in an environment or in a short term period where things get a little bit choppy. So cash is always a very important thing to have, it buys you optionality, it's an under-utilized resource in portfolios and something people should always default to in times of uncertainty, not necessarily in times of market stress.

Transcript

0:12: Volatility can be your friend

Ryan Friedman: There’s always going to be volatility implicit in anything you do really, and the same applies to investments. Within the context of investments, they are more volatile the higher the prospective returns, so for example equities promises you a higher return, and therefore the volatility associated with that particular asset class will be higher than cash for example.


What is very important in understanding volatility and managing investments is a long-term perspective. Volatility can be your friend if you have a long-term perspective. Volatility can be a nightmare or very scary if your time horizon is very short. Therefore, having a long-term perspective when managing money or investing money, one has the ability to actually utilise volatility as an opportunity and not a potential cost to the portfolio.


01:08: Expertise can help you manage volatility

Phil Shaw: Well if the future was really easy to predict, we wouldn’t be doing the jobs we do – you wouldn’t need professionals or experts. Hopefully what the expertise brings to you is some more clues, so that you can predict the future better than other people and that’s where the value add is. No one pretends that an investment professional can get everything right, that’s just never going to happen. But if you can spot big changes in the markets, then you’re adding value, you’re helping to preserve and enhance peoples’ wealth.

01:53: Following the herd

Phil Shaw: It is important to know what the herd is doing, where the momentum is, you don’t want for example to invest in a market that’s necessarily falling heavily. Sometimes you’re trying to dodge raindrops going from A to B, but at the same time it’s important to recognise whether you think there’s value in a particular asset class or a specific market so that when momentum might be turning, that’s the point where you say right, this is where we’re going to start investing in that particular asset class.


02:53: Cash can be risky too

Annelise Peers:  If you come from a treasury perspective and I mean a treasury, a corporate treasury, you always manage cash as one to three years on the curve, that's normally viewed as cash because you have a very short time horizon, you know you'll get your money back and often as an investor it's safer than holding cash. There is this misnomer that cash is the lowest risk investment, however, you have counterparty risk, particularly if you have a lot of money. When you have a few hundred dollars in the bank, it's not risky because you will always get your money back when the bank goes under, however if you have a few million, so if you have a hundred million portfolio and a million is placed with one bank and that bank goes under, you are only guaranteed about $100,000.


03:50: The 6ft man

Ryan Friedman:  We have a fascinating engagement with one of the world's best investors in New York and he has a great saying, 'Did you ever hear about the six foot man, the 6 foot tall man who died crossing a river that was five foot deep, on average', what that means ultimately, is that you need to have sufficient powder dry and you cannot be over leveraged that will make you sink [00:04:19] even in an environment or in a short term period where things get a little bit choppy. So cash is always a very important thing to have, it buys you optionality, it's an under-utilized resource in portfolios and something people should always default to in times of uncertainty, not necessarily in times of market stress.