Investors, savers…whether of Main Street or financial profession…are
perplexed as ever. Major changes have swept the globe in recent years. The
primary alerts to these various epochal shifts have, of course, been
financial crises, mass behavioral swings, and a pronounced shift to
populism (as well as other trends) in the political spectrum.
The loudest bellwethers of this new perspective were the pro-Brexit vote in
Britain and the election of Donald Trump as President of the United States.
There are others, as well. For example, the Syriza Party in Greece, the
Podemos Party in Spain, President Rodrigo Duterte in the Philippines, Geert
Wilders of the Party for Freedom in the Netherlands, etc. There are more
such shifts to come, perhaps even in France.
What is perhaps less visible to most – though likely the real essence of
potential impact – is the collective shifts in global geopolitics. These
have potentially monumental implications for economies and financial
markets. Looking back, during a 60-year period of multilateral and
internationalist leanings, the globe was showered with the benefits of
increasing goods trade, cooperation and globalization generally.
In recent years, a new shift has been underway. Why? Primarily because the
ultracompetitive environment of globalization left a lot of people behind
in terms of economic inequality. A backlash from the discontented populace
is now underway. Historically such movements have been the impetus for big
changes in domestic affairs. Now, viewed globally, the world is swinging
back to imperialism and bilateralism – said differently, to
pro-sovereignty, nationalism, and the pursuit of domestic interests. Chants
of “America First” are not exclusive to the U.S. “Britain First” and
similar slogans are heard in other places.
With all these changes, understandably, we are often queried by clients as
to what the outlook holds…to what assurances we can offer that their
portfolios will fare well over time…and so forth.
With so many unpredictable and fickle events taking place, it would be
disingenuous to attribute any tactical portfolio successes to powers of
perfect prediction and insight. Global policy uncertainty is at an all-time
Given the present cauldron of change, what approach then must one take to
steer through this environment of knowns, known unknowns, and unknown
unknowns (to borrow phrases from Donald Rumsfeld, former U.S. Secretary of
Defense. See quote above)? How do we deal with the unknowns? We lay out our
Firstly, one must develop a disciplined and rational thinking process. It
must be based on facts and theoretical causality to the extent possible.
Next, one must strive to identify the non-normal, the extremes, and the
incongruences of financial conditions against the research of facts and
past precedents. For example, at this time U.S. equities are the most
expensive in their own right in at least 10 years. Also, they are the most
expensive relative to all other countries in the world in at least 10
years. In addition, they are most expensive against U.S. bonds in nine
years. This is the type of “extreme” situation that must not be ignored.
We must vet popular expectations (sentiment). So doing, we try to pick out
the facts from the innuendo and the hubris. The moods of financial markets
do not always align with real underlying developments. Sometimes these are
as Venus versus Mars. For example, U.S equity markets have soared on the
belief that U.S. reform efforts – promised lower corporate and personal
taxes – will lift economic growth and profits. However, equity markets have
risen in value equivalent to more than 30 times the possible savings in
corporate taxes. This triggers an alert, since we cannot square away
current market expectations with reality.
It is vital that human behavioral trends and psychological dispositions
also be considered. Why? Because it is only humans that have complex
relationships with “money.” Furthermore, the laws of physics demand that
not everyone can be rich and that not everyone can hold the same view
without impacting financial markets. The majority is never right…at least,
not for very long.
Next, we think globally and identify the interconnectedness of factors – so
as to better understand how these will impact a globally diversified
It is then helpful to formulate possible scenarios that may play out in the
future. We then assign probabilities to the main scenarios. Sometime there
are more potential “wildcards” than at other times. However, never can one
scenario have a 100% prospect, nor can we account for the full 100% range
of possibilities. These are what we know to be unknowns and unknown
unknowns. The reality is that a significant range of possibilities will
always be unknown to us. This is the big handicap we all face.
Finally, and crucially, we must therefore diversify portfolios both in
terms of asset type holdings, scenarios, global versus domestic content,
asset mix, currencies…etc. Here we meld and/or tilt whatever informational
perspectives that we have (and there may be many of these) with risk
Does all of the above sound daunting or boring? We actually do take all of
these steps – discussing the various scenarios and factors around the
conference table – at our quarterly tactical strategy sessions which are
conducted over eight days (and, that does not include the time we spend on
preparations and the regular weekly strategy meetings). Every step is
documented, leading to a multifactorial, diversified strategy, which is
then applied to all client portfolios.
The most crucial outcome of our disciplined investment process must be “No
Big Mistakes.” Everyone is destined to make misjudgments about the future
because of the “unknown unknowns.” These are usually not terminal. But “big
mistakes” take a long time from which to recover (due to the mathematics of
Emotionalism and populism, are playing a particularly large role in
financial markets at present. A disciplined “thinking regimen” is more
needed than ever.
That will contribute to the avoidance of big mistakes. Crucially, a process
like we have described bridles the anxiety and emotionalism that arises in
times of great uncertainty. It is these emotions that are potentially the
most lethal for investor. Short-term decisions driven by these are often
Independent research shows the crushing impact of emotionally-driven
decisions. Most investors do not even earn returns of a short-term bank
In conclusion, diversification and both disciplined thinking and
decision-making are necessary to the task of managing investment
portfolios. And a bit of luck will always be welcome, too.
Tyler Mordy, CFA, is President and CIO for
Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities
selection. He specializes in global investment strategy and ETF trends.
This article first appeared in
Forstrong’s Gobal Thinking feature. used with permission. You can reach Tyler by phone at Forstrong
Global, toll-free 1-888-419-6715, or by email at
firstname.lastname@example.org. Follow on Twitter at
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