It feels as though we are in a transition period. Perhaps we are transitioning from a state of under-investment to a state of investment. What makes the transition murky is the fact that leading up to this transition is a substantial market performance. It is possible that we are transitioning from a state of high risk appetite to a state of low risk appetite. This seems to be the consensus, or the common inference from what is observed: risk asset classes are under pressure; therefore it must be that people are reducing risk. The thought process that leads to this conclusion is linear. The question then is: was there really increased risk appetite and how widespread was it? We look at flow of funds data and we witness a substantial and continuing flow out of equities. This is not consistent with widespread risk taking.
If widespread risk reduction is not what is playing out at the moment, what explains the negative moves we are witnessing? I am a strong believer in the power of expectations. As such, China’s tightening actions should not be leading to sustained sell-offs as they have. They were conveniently telegraphed and discussed since 2Q 2009. In fact, a quick look at stock indices of major industrial and construction sectors in China would show peaking in 3Q of 2009. The expectation for tightening developed a while back. Still, a contributing factor? Perhaps; but contributing factor is what one says when the answer is ambiguous.
Anchoring is seen as a vice (read “seeking wisdom” and “think twice”). I think the books refer to anchoring as a desperate escape from changing axioms; hanging on to status-quo too much and too long; inability to consider change and its logical outcomes. I don’t think you can invest thoughtfully without having anchors (preferably just one.) Yet there are levels of anchors. You can anchor yourself on a big theme: China’s urbanization trend, green economy, resources scarcity, balance sheets, or a number of other themes. It would take a serious disruption in the human matrix to break these themes. Anchors on short-term themes are perhaps what the authors refer to. Imagine investing on the premise that the US natural gas market will tighten up by year end. Not an optimal strategy because you have a large number of assumptions to defend. A fatal flaw in any assumption can devastate your mission. There are too many what-ifs that are difficult to handicap.
Where am I going with this? There is a huge anchor I am advocating here: an innate human desire to have a better life; more specifically a better material life. Whether that means urbanization, green economy, or just wanting to see people in your neighbourhood unburdened by the fears of losing their jobs and homes. These are manifestations of that desire and are like volcanoes about to erupt. Nothing can stand in their way as they have been building up pressure for a long time. Investing with these anchors in mind means allocating capital to and within these themes. The winds of the market will blow in many directions as people deal with delusions, disappointments, and hope. Only strong anchors can keep you focused on the path.
