Uncertainty and Caution…
Our last note was a number of weeks ago toward the end of March and whilst we’ve been busy advising, researching, analysing & sense checking for any blind spots in financial plans and portfolio strategies we’ve also adhered to our principle that if we don’t have anything additive to say we don’t write it.
What we’ve learned to be certain about over the past 10 weeks or more, if of course we didn’t already know it, is that nothing is certain! We’ve always acknowledged that there will always be times when we as advisers or investors simply do not know. Our statistical rolling analysis puts this number at around 5-10% of the time or another way 1 – 2 years out of every 20.
The previous catalysts for uncertainty have been varied and straddle many decades. They include financial crises, terrorist attacks, technology bubbles, oil price wars, earthquakes and many more; but none have resulted in the collective global ‘lockdown’ of economies around the world, developed or not. The medium and long term impacts are quite simply unknown. No matter how much re-calibration of forecasting by economists, analysts and other eminent intellectuals is done, accurate models do not exist for economic lockdown. Ultimately it’s unsurprising that if you’ve never experienced something before, you can’t say how it might turn out.
How will unprecedented Government financial support all around the world offset the inevitable economic and social damage caused by tackling the spread of COVID-19? Will easing economic lockdown result in a re-emergence of the virus and further lockdowns will resume? Will inflation reappear in our financial systems and to what level? All these questions and more are and will be examined week in week out by economists and forecasters in an attempt to aid how investment strategies should be shaped. Quoting the great J K Galbraith…
‘We have two classes of forecasters. Those who don’t know – and those who don’t know they don’t know’.
So should this lack of knowing hold us back? We believe not and the key to maintain a stable approach to portfolio management is also well summarised by the famous quote often attributed to Mark Twain;
‘It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so’.
In an uncertain and difficult world amidst a global pandemic it’s never been more important to keep a calm open mind and implement carefully, an objective process to help with investment decision making. In fact, we don’t see any sensible alternative to this approach and never have.
As we continuously closely monitor events and keep a careful eye on risk for all our clients, an air of nervousness is apparent, which of course is to be expected and wholly natural in such difficult times. If we can admit to uncertainty, we should naturally be able to investigate fully before investing, double-check our conclusions and proceed with ultimate caution. This is good practice and is being applied to our advice process day-by-day with and for our clients.
This air of nervousness, although ever present, has seemingly subsided in some quarters in recent days. Re-calibration of improved forecasts and higher confidences emerge, as markets have stabilised and started to recover many of the losses from March. Through April and May stock markets have continued to increase. A period of positive consolidation should be welcomed. It is certainly preferable to seeing a continuation of April’s upward surge, potentially increasing the vulnerability of stock markets, increasing volatility and potentially unhelpful wider economic instability. There is also the belief that very elevated valuations are desperately out of step with the severity and length of the depressed corporate earnings ahead.
We cannot help but think the old investment adage of ‘sell in May and go away’ feels inappropriate this time – not because we cannot ‘go away’ (not very far yet anyway in theory!), but because so many things are in flux which could change current forecasts and subsequent expectations quickly.
Within the uncertainty of the unknowns we can apply more discipline and caution and by definition, more stability for our naturally cautious clients.
Our primary focus as you would expect, is you our clients and each and every one of your individual requirements. Our Nestor ‘DNA’ is to carry more caution than the norm into our risk analysis / management and client advice. We have not wavered from this important principle during this current crisis.
Many financial advisers have been keen to deploy funds into risk assets, because they see a ‘bottom’ to markets. Whilst it is true some areas of the market have become ‘cheaper’ others, with an obviously positive outlook post COVID-19 have continuity and capacity to thrive bolstering the wider market by offsetting some negative sectors.
As long term investors we are not looking to time markets. We have avoided the temptation to rush into these dangerous waters. We have cautiously managed cash positions and in conjunction with our carefully selected investment managers, ensured our client portfolios hold assets that still look attractive for the long term, based upon sound criteria able to stand the difficult tests over the past few weeks, and more so in the coming months and years.
It is not a time to blindly allocate funds into markets and passive trackers when, in all likelihood, much of the current market will be re shaped post COVID-19. Consistent proactive selection and risk testing is critical to ensure unnecessary risk is avoided, and sensible careful risks are managed and monitored with the finest of tooth combs.
We have in the past week issued another round of additional questions to all our investment managers, in addition to our regular investment management scrutiny and continuing due diligence. We are actively looking for any potential blind spots, in order that we can remain comfortable & confident that as much detail is being examined day-in-day out across all our client assets.
Between the Directors at Nestor, we’ve witnessed a fair few ‘bear’ markets and recession cycles. As we’ve stated, the catalysts are often very different but a common theme has stood us in good stead. It’s technically known as ‘appropriate risk aversion’ or ‘risk management’ and no doubt other descriptors exist. We look to avoid unnecessary risk, always have and always will. So we prefer ‘investing scared’.
Worry tends to sharpen focus and we’ve found over many years that long-term financial plans are often more successful when applying thorough due diligence, conservative sensible assumptions and a significant margin of safety (usually cash), should our unknowns arrive early into our long term strategy. This tends to ensure we maintain a sharp and real focus to help our clients preserve and grow capital and income sensibly over the course of their own investment time horizons. Our current simple checklist is where we sense check our advice and approach;
- The world today is more uncertain than any other time in our lifetime.
- We need to make investment decisions about the future even though it is unknown.
- Over-confidence is potentially catastrophic but some confidence is needed for successful investing.
- The ability to achieve a knowledge edge is less possible the bigger the topic – world; markets; economy; rates; currencies.
- Investment decisions about funds and holdings are influenced by the bigger topics, so they consequently remain uncertain
- Being able to intelligently deal with uncertainty, is one of the most important skills.
- It is crucial to understand limitations on forecasts and predictions otherwise you might head for a fall.
- Communicate regularly and clearly with our selected managers and industry experts, but recognise the varied answers that mean the same.
There may well be a New Economic Order emerging, incorporating a quickening of pace in history. This tend to happen after crisis periods. New thinking will emerge from governments and central banks in order to tackle social and economic changes. Investors will be faced with greater government interventions, more monetary and fiscal activism, increased corporate governance and more detailed sustainability models to name a few. Adopting flexible and thorough approaches to the inevitable challenges ahead, will be essential in order to generate permanent, high quality, long term, risk adjusted returns.
Another way of looking at it maybe to quote Voltaire who said over 250 years ago;
‘Doubt is not a pleasant condition, but certainty is absurd’.
If you want to speak to us about this article, or any other issue, please contact us.
Nestor Investment Committee
Please remember that past performance is not a guide to future performance and the value of an investment, and any income generated from them can fall as well as rise and is not guaranteed, therefore you may not get back the amount originally invested and you may not recover what you invest. Investments should always be considered as longer term. This document should not be construed as advice regarding investment in any product or to buy or sell any investment. The information contained in this article is believed to be accurate at the time of publication.
Whilst care has been taken in compiling the content of this document, no representation or warranty, express or implied, is made by Nestor as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.