May 28, 2014
[Editor’s note: This post comes from Tim Price, frequent Sovereign Man contributor and Director of Investment at PFP Wealth Management in the UK.]
“I don’t know what to say. I’ve been investing since January and I’ve never seen anything like it.” – Unnamed Hong Kong housewife during the Asian financial crisis of 1997/8.
What follows is a continued personal perspective on some of the challenges facing today’s investor:
1. For many investors, capital preservation in real terms should be more important than capital growth in notional ones.
2. Investors – as humans – are typically loss-averse. We feel the emotional impact of equivalent gains and losses disproportionately. This does not mean we should avoid considered risks, but to invest dispassionately.
3. Investing dispassionately is difficult when most of the investment media comprise the participants in a 24/7 circus. If the business of investing is either entertaining or exciting, you’re doing it wrong.
4. The answer is obvious: turn off CNBC. (Judging by their viewing figures, plenty of investors already have.)
5. True diversification remains the last free lunch in finance.
6. Having fatally tainted monetary policy, the dismal science of economics has wrought damage across investment theory as well: ‘homo economicus’ does not actually exist, and markets will never be wholly efficient until all people are, too.
7. “The investor’s chief problem – and even his worst enemy – is likely to be himself.” (Benjamin Graham)
8. The general principles of investing are not arcane. They should begin with the avoidance of loss.
9. Starting valuation is the most important characteristic of any investment.
10. Risk is poorly defined as volatility. It is better defined as the possibility of a permanent loss of capital.
11. “Operations for profit should be based not on optimism but on arithmetic.” (Also Benjamin Graham)
12. Don’t buy poor quality investments pushed by sell-side interests; don’t overpay for quality investments.
13. The ‘equity / bond / property / cash’ paradigm struggles fundamentally in an environment where all of these asset classes appear overvalued.
14. Friends are unlikely to share their worst investment outcomes at the golf club.
15. Liquidity is overrated. For capital that can be safely committed to the longer term, it is irrelevant.
16. Private investors are often poorly served by the asset management industry.
17. The medical profession has the Hippocratic Oath: first, do no harm. The asset
management profession lacks such an explicit expression of fiduciary commitment to its clients.
18. Private investors may, all things being equal, be better served by small, unlisted, private partnerships than by global, publicly listed, full service investment brands.
19. Rising compliance and regulatory pressure reduce variety in the asset management business. This is unlikely to be in the best interests of private investors.
20. When interest rates are close to all-time lows and the printing presses are running, the merits of ‘deep value,’ profitable, well-managed businesses are more than usually compelling – compared to just about any other asset or asset class.
21. Distrust anybody who claims to have all the answers. Especially today.