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.
Hi Amine,
ReplyDeleteSince you make reference to viewing investing as an extension on your thoughts of life at a spiritual level it is quite apt, in my opinion, that the title of your comments is anchor. Just as in investments, without an anchor or framework is easy to get lost. Sometime ago i read a quote that stated something like: it is ok to want to climb the ladder, just make sure the ladder is placed against the right wall. That is what an anchor does at a personal level, it allows us to place the ladder against the right wall.
An important difference though between an anchor at a personal level and in investing is that while at at personal level the anchor is or should be steadfast in the investment world the anchor needs to have flexibility to accomodate external factors. This is best illustrated by the remark of Keynes: The market can stay irrational longer that I can stay solvent.
Now more at an investment level, i think it is good to view the investment themes within the context of valuation, interest rates, liquidity and currency. The events of the past few days then perhaps can be viewed as a reaction to a couple of variables within this framework.
As always good to hear from you. Take care -- Gerardo
Well, I think that makes general sense from a non-market analyst perspective. I tend to take a cynical view: "People are dumb..a person is smart". To me, the real issue, the "anchor" is one's one relationship with the world. Family, religion,work, play, one's self...all can be institutions we use like the legs of a table. If you have enough avenues of support (legs on the table) you are likely to lead a very stable life. A stable life gives perspective. Perspective allows one to see what is versus what they want it to be.
ReplyDeleteI try to not look at the market in terms of commodities and trends. That sounds silly, but to me too much scrutiny will get one to focus on things that may not matter. I try to look at the people, the humans, the little guys who are trying to find the next sure thing. The past decade has turned people into day traders. The past decade has created all sorts of vehicles and avenues for those who are not too sophisticated to dabble in worlds that they previously left to the pros. Heck, my retired Dad transacts shares of UTC from his pension just to feel alive.
All this to say, it seems to me that the market reflects the world. Not the actual commodities or even what is...but what people need it to be. Kind of like a snapshot of a cultural moment in time. "People". If you follow my meaning we have a much smaller global economy, filled with new products, vendors, and neophytes. I would like to suggest a weird concept. What if some of the nonsense you perceive is just people without the same perspective as you, painting pictures they want to see without the anchors to see what's really there? What if that doesn't matter to them? What if, instead of winning, the majority of those in the market just need be a part of it? Not playing to win, just hopefully, speculatively, chasing lottery tickets until the next sure thing arrives. If the old ways don't work, new ways must be developed. "People" won't do that, but some person might.
I think your description of this anchor also characterizes a commitment, a personal commitment to support what Amartya Sen calls Development as Freedom. As an investment commitment, this requires you not to compartmentalize away your values when you put on your professional hat and buy and sell securities on behalf of a clientèle that hires you, among other reasons, because they hope their money will be safe and growing (at least relatively) with you. But what does non-compartmentalization of this commitment mean for a professional like you? There are different ways to think about such a commitment not to compartmentalize your anchor. One version might require you to choose only investment decisions that you feel directly and palpably reinforce your commitment in support of development for human freedom. Another account might demand mindfulness towards the development implications of every investment decision and a long view towards a career (and a life) that as a whole makes significant strides in support of human development. In thinking about this spectrum of possibility of your personally-defined professional obligations, it seems to me this commitment has an essential aspirational quality that might get lost with the metaphor of an anchor. Development for freedom as a personal commitment certainly is grounding like an anchor, but as a driver of decisions it seems to me to be fluttering in the sky, a possibility not fully yet described, something we try to make out as clearly as we can and which we influence through our acts of hope as we jump up and reach for the stars.
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