Weekly Talking Point - 19 November 2018

Jonathan Ramsay
Jonathan Ramsay
InvestSense Director
Volatile periods like last month get everyone thinking about whether this is the start of a serious down turn. Here we use a sailing analogy to demonstrate that so far this is a squall rather than a full blown storm. As such it is a very good time to assess the sea-worthiness of your investment ship just in case there is a bigger storm on the horizon,


      1. Based on gut feel we’d probably argue it just well might be. But do you feel like planning next years holiday based on someone’s gut feel about whether it’s going to be a great summer or not? We think it’s best to be just as circumspect with your money.
      2. That said there is a lot we can do to make the savings journey a little less turbulent. For one thing we are endeavouring to make portfolios a little more defensive without giving up too much upside. Even more important is the behavioural side. Despite the increasing availability of data and the quantitative nature of investing, the financial market remains an inherently unpredictable creature, one that essentially captures our collective emotions and doubts.
      3. This article outlines a narrative that might be useful, likening long term investing to embarking on an ocean passage. People’s overall approach depends on their own sensibilities and resources. Given those constraints you can prepare well for any storm even if you can’t exactly predict when it will hit you.

    Over The Last 30 Years Mr Market Has Trained Us All To Anticipate The Next ‘Big One

    We now all seem to have an innate understanding of what it means to be selling at the bottom and buying at the top and why we should be doing the opposite. 30 years of ‘up by the stairs and down by the elevator’ every 10 years or so has taught us that much. Gut wrenching market falls make it easier said than done but we do our best. It also leads to an even stronger impulse to make extravagant calls about when the next ‘big one’ will be. Our clients now expect nothing less. In a room full of 10 advisers or investment managers, there will always be one vocal hero but the reality is that the best minds on the planet routinely struggle getting this right. And the stakes are high.

    With markets looking expensive, huge levels of debt and rising interest rates - another financial crisis seems inevitable. But it would also be strange for markets to serve up something quite so predictable. Timing the next big fall is far from a given. So whether you move too early, leave it too late or do nothing at all, some resilience will probably be required in all cases.

    Long-Term Investing Really Is A Lot Like A Long Sea Passage

    Long-distance solo sailors are specialists in resilience and resourcefulness and their stories can inform our approach to long-term investing. In 1966 the first Golden Globe Challenge saw a disparate fleet of amateur sailors. Only one of them: Robin Knox-Johnson completed the challenge thanks to a combination of steady temperament, experience, preparation and luck. At the other end of the spectrum the over-optimistic Donald Crowhurst (inset) relied too much on technology and, after a very strong start, encountered difficulties and ultimately lost his mind and then his life. If anyone is more interested in that there are many books and ‘A Voyage for Madmen’ is particularly good. There have also been a number of films about Crowhurst including one starring Colin Firth this year. And, lastly we happen to be half way through the 2018 revival of the race, which does not allow a modern technology such as GPS.

    The sea faring analogy, or one involving a desert crossing for landlubbers, helps make the link between our best laid plans and unpredictable elements. In both cases you know where you want to get to but you also have to do it in a manner that keeps you and your family safe. You’ve got a forecast and a feel for the seasonal variations but some storms are worse than others, and equipment failure can cause unpredictable outcomes under stress. You have to take calculated risks.

    After Last Week’s Squall It’s A Good Time To Check The Manifest And The Seaworthiness Of Your Vessel

    If you return back to harbour at the first squall you’ll just spend your time going backwards and forwards near the shore, ending up more or less where you started. Having said that if the boat is already leaking then it would be foolhardy to plough on without taking stock.

    In periods like last week some people's discomfort maybe a sign of a leak in the strategy and insecurity about investing. Why is that? Is it because they are also insecure about their job, mortgage payments or retirement prospects. Or maybe they just don’t get much of kick out of sailing through rough waters. This year has been somewhat exciting but we haven’t seen a big storm yet.

    What If Someone Was Actually Controlling The Investment Climate, And He’s Not Nice?

    The weather analogy gets a little bit more difficult at this point. To make it more realistic you have to imagine that there is an evil god that actually uses the weather to make life as difficult as possible for us mere mortals. So for instance imagine that the calm periods are designed to lull us into a false sense of security and that the largest storm will inevitably materialise when we are at our most confident. And then the elements will only stabilise when we are all convinced that hurricanes have become a permanent feature of the landscape.

    In reality the malignant entity is our own animal spirits - markets endure their biggest falls when sentiment is strong and as result markets are expensive and have further to fall. Conversely, when our expectations of financial assets and confidence in the system is at rock bottom, then the upside is clearly greater. That is relatively easy to conceptualise but believing it amidst euphoria or depression is much more difficult.

    As we batten down the hatches you could use last week and the Dashboard to do a bit of your own stress testing

    The risk (horizontal) axis of the InvestSense Dashboard is designed to help you think about how sea-ready your own investment strategy is. Each dot corresponds to an InvestSense portfolio. Everyone wants to go as far and as fast possible in favourable conditions (represented by expected returns vertical axis).

    You can point to last month and ask how much anxiety, if any, that caused. Then you can compare that reaction with the potential outcomes that we see on the horizontal axis. This may engender a potentially emotional reaction. In this way perhaps we can use these episodes in markets as training to increase resilience and/or plot another course.

    This is one of the main reasons that we believe that making the ‘Big Call’ should be secondary to thinking about whether you need to make the ‘Call’ in the first place given your resources, context and sensibility, all in the face of uncertainty. Remembering that the uncertainty of financial markets is worse with the weather - our anxiety, and that of others, can’t make the weather worse. It might be that, rather than fret about changing course, you are psychologically strong enough as a seasoned investor and happy to ride through the storm. Or you might feel that actually your enthusiasm for a fight with the elements is quite limited. In that case it might be worth considering moving down a risk notch.   


    I like weekly market updates. Looking forward to the next instalment.

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