In place of my usual Crystal Ball looking at the year ahead, I want to take a longer perspective and think about the lessons we can take from the last 40 years. The period from the end of the 1973/74 bear market, through the Great Financial Crisis to the present day, encompassed not only widely different market conditions but also a period of rapid development in the asset management business. It also happens to span my career in the City. As I reflect on this extraordinary period (or is it?), I do believe there are a number of lasting lessons we should take on board to help guide us through the next 20 years.
- During this time there have been many completely unforecastable events and developments. How should we respond to the unexpected?
- There have also been developments we could foresee with reasonable certainty. How should we respond to those?
- Time and time again we are reminded of the obvious. The best predictor of future returns is the price we pay for an asset! How can we control our many natural behavioural biases so that we do actually buy low and sell high?
- Our understanding of risk has developed a great deal. Volatility is not in my view the best measure of risk. Indeed volatility can present opportunity. Importantly volatility presents different issues for different types of investors.
- We are often guilty of making things too simple, and at other times too complex! It is important to understand the difference. Time-weighted returns are simple but can often mislead us, and regulation has a nasty habit of producing complex unintended consequences that drive us to be pro-cyclical. We had all better understand that.
- Finally, as an industry we can organise ourselves better. There is a great opportunity for those who are ready and willing to grab it, whether as an asset owner, asset manager or consultant. We can deliver better outcomes.
Expect the Unexpected
Are you ever surprised by coincidences? Well you shouldn’t be! A world without coincidences would be a very strange place indeed. While any one coincidence may surprise or even delight, we should really worry if there were none at all. The same is true of the unexpected. Unforecastable events happen all the time. As an investor we need to recognise that. We should all be quite humble about our ability to predict. I am not just talking about political or geological events such as 9/11 or the Indian Ocean Tsunami that caused so much devastation in 2004. Disruptive technologies, which almost by their name come out of left field and surprise us, can have a huge impact. In the late ‘60s and early ‘70s the concept of the Nifty Fifty was prevalent. These were stable, large cap stocks that you could “depend” on. You could buy them and put them in the drawer and forget about them, or could you? By what hubris did we imagine that we had any idea what the competitive landscape would be like for Kodak and Xerox just a couple of decades later?