Navigating your way in tumultuous waters

Defined as highly unpredictable, black swan events come as a shock and usually lead to massive portfolio value destruction due to investors panic .

While some will retroactively argue that these events were actually predictable, the fact is that history in stock markets shows that such events happened…and will happen again and again whatever the safeguards you put in place.

These so called “black swan events” make me think that current market conditions are literraly paralysing investors decisions and raising questions such as:

  • How and where to get yield?
  • Is it safe to stay in the market?
  • Shall we invest in emerging markets?
  • What could be the dominos consequences of a Fed rate hike?
  • …And what about China?

Over the last 12 months, we’ve seen incredible excitement about India and China, then came the rush towards Europe’s stock market and massive desertion from emerging markets. Now comes the time when everybody’s talking about different kind of strategies supposed to be the best in time : “multi-assets”, ETF’s, “merger arbitrage” and so on.

Well the truth is that there’s no safe road. Whatever the paths, there will always have some bumps. While nothing can ever be granted, some basic rules can help minimising the bumps and remain in course.

  1. Irrationality can sometimes overtake the most solid economic fundamentals..

 As Howard Marks, Okatree Capital Management CEO rightly emphasised at the last Bloomberg talk I attended in Singapore on October 27th : market shocks are totally random and can happen anytime, anywhere with more or less magnitude. As such, investment portfolio shouldn’t be construed solely on macro forecasts as massive market downturns can happen anytime due to unexpected events (commodity prices tumble, 2008 financial crisis, etc.).

Not undermining the importance of economic and financial considerations, a mix of flair and luck are therefore essential.

Irrational movements will actually keep growing in size and magnitude due to the growth in retail investors direct trading (emerging markets) and speed of information diffusion.

  1. Don’t wait for the crowd

A basic principle in investment: “Sell when people are ignoring risks and Buy when people are over considering risks”.

This concept that could be applied to any other situation in life actually relies in the capacity of maintaining an helicopter view of the situation and assess the “right time” to become more aggressive or reversely more cautious.

  1. Don’t put all your eggs in the same bucket

A very old say but rarely followed when enthusiasm outweighs rationality. Depending on the context and investment, diversification can take any angle (asset class, sectorial, regional) but has to remain a line of conduct in order to mitigate volatility.

  1. Consider branding but focus on performance consistency

While it sounds pretty fair to prefer low fees and large branding fund houses, this is not necessary a guarantee of steady and rewarding performance. Beyond branding and investment strategies, here are some specific factors to keep an eye on:

  • Portfolio manager’s experience in managing the fund (is the performance related to his own management or did he just started to manage it?);
  • Historical performance: while history cannot be indicative of future performance, it nonetheless gives an idea of the fund’s resistance in market downturn periods;
  • Level of risk: is the performance related to the sole portfolio management or supported by derivatives instruments?
  • Track record: a minimum of 5 years sounds pretty fair to assess historical performance;
  • Management fees : they should be considered related to the performance of the funds and not as an “isolated” factor of differentiation.

All in all , there is no exact science about investment strategies. Whatever the marketing packaged around, any investor should forget about the noise and remain diversified as well as steady with its objectives.

As used to say Warren Buffet “ predicting rain doesn’t count…. building arks does”.