Investors International Forum


Jeremy Blatch \| 16/04/04 "He who sows the wind will reap the whirlwind!" First published in the Sur in English, Malaga, Spain In an increasingly uncertain Global economy NEED NOT GREED should be the maxim governing investors strategies, says Investment Consultant Jeremy Blatch. Driving through the Fog. As anyone who has taken part in a battle (fire- fight) will know when the "lead begins to fly" things suddenly get very confused. Fear fuels adrenaline and in the heat of the contest for survival its "dog eat dog". The human spirit at its best and at its most depraved. Mistakes happen and in the aftermath no real appetite to apportion blame. Inconsistencies and the unexplained are attributed to the "fog of war" and burned into yet another compact disk and confined to history. The corruption and recent carnage of the stock market has a familiar ring to it. We will see? Who knows best what direction the world"s financial markets are heading in? The specialists who use state of the art technology to keep informed of world events? The specialists who optimise research techniques utilising charts and computer models to interpret the mass of information received by the minute? The specialist moved by intuition and experience? The Clairvoyant, who utilises the crystal ball or the coffee dregs, handed down through previous generations? Well if the last four years are anything to go by, none of them would have come close to the actual reality of what has happened in world stock markets. I wrote, in an article some four years ago and said "if historic averages are anything to go by we will need a considerable period of negative returns to rebalance the historic averages. This could be several years!" The largest economy in the world the USA is the driving force that many smaller economies mirror, due to economic or monitory necessity or both. As an example, UK the third largest developed economy, "catches the cold after America sneezes". I believe, looking back, that the excesses of the American consumer will be the main contributing factor during the roaring nineties which caused the effect felt in today"s markets. Recent statistics show a 2001 recession deeper and longer than previously estimated, with the resulting poor returns less support from the consumer was the main factor. In spite of much "whistle blowing" corporate and domestic America is stuck in a spirit of arrogance and denial, as the imbalances of the 1990"s are corrected. Whilst we have experienced in 2003 a rebound in equities, the likelihood is there is more pain to come! The level of individual and corporate debt both unsecured and secured has reached historic highs, sovereign debt and the fiasco of the EU stability pact, are producing a hitherto unseen level of volatility resulting in unpredictable swings in the fixed interest market. Western Industrialised countries are moving towards technical bankruptcy through the debt burden of providing pension income for an aging population and with less potential to fund it from a shrinking population! The discipline of saving has been totally eclipsed by a consumerist ideal of spend now pay later. It is now commonplace in Europe as in the USA for university students, to be bogged down by huge levels of debt, which will continue through their early adult lives. The reality is that this is leading many to young lives of crime, prostitution and drug dealing to survive. Risk and Reward In this current environment you make money by not loosing it. Many investors whose spending requirements are high in relation to their capital will be suffering extreme anxiety as they see capital being eroded, having been tempted into a high exposure to equity markets. Many people seek investment advice because they have become wealthy and can now afford to live from capital without the need to work. But learning to be a capitalist is not easy when you have been used all your life to directly controlling your capacity to make and to spend money. This emotional process takes time. Some find it almost impossible to make the transition, and are constantly dismantling investment strategies to raise cash for a new property or entrepreneurial deal, which offers quicker rewards. But my experience is that most with real wealth wish to use the opportunity to peruse new interests and responsibly. What better way than to make it work for those who need it! Tiger Woods, one of the worlds most successful golfers, was reportedly asked recently what motivates him and his reply was the foundation he has set up to help young black children in need" Fact and fantasy. I spend most of my time when people come to me for advice attempting to explain the financial facts of life. Or in other words separating financial fact from fantasy. Sadly some have difficulty accepting this, and may prefer to be led towards what appears to be a more attractive solution. In my opinion money is far too precious a commodity to be sold, and investment strategies do not need to be complicated but do need to be realistic. If cash on deposit is giving a return of 4% pa and you require an income of 5% pa then clearly you either spend less money for a while or take a greater risk than cash offers. You need to address your spending requirements first with a very low risk portfolio, and anything left over can go into a growth portfolio. Quite simple really, but few employ this strategy. The problem is that most people who get caught struggle because they do not have enough capital do generate the income they require, and are tempted into products and constructions that offer unrealistically high returns. You get to stay wealthy or increase wealth by the annual compounding of common stocks over time and ensuring that your income is not affected. I believe that people generally are more concerned with safety of capital then doubling their money in five years. It is very important to ensure that you have really evaluated your investment time horizons, and have an assessed your "Risk and Reward" trade off properly. The question you should ask with any portfolio or investment is what is driving your allocation of assets, need or greed.? If the later, then you could pay very heavily if the optimists are proved wrong. There are always alternatives for any investment strategy, as investing is anything but an exact science. Many investors are moving out of equities into bond and money funds. Fund managers employing alternative investment strategies and fixed interest managers have been the most successful over the past four years. Giving your money to these mangers will have produced a return better that cash on deposit over this period. Whilst cash is hardly king by any stretch of the imagination, it may be prudent to hold cash, depending on the currency, until the financial market signs are a little clearer. Money Market funds offer a useful alternative to time deposits for the investor who wishes to take profits and remain out of the market for a while. The advantage over time deposits is that you receive a comparable or better rate of interest, without the need to fix the capital. This means that you are able to reinvest immediately when judged appropriate, without incurring a cost penalty associated with breaking a time deposit. Some institutions will allow you to transfer funds free of charge and you will usually be able to switch currencies at money market rates of exchange. Conclusion Whether assessing investment strategy as a private individual or institution, in this fragile Global economy the need should clearly drive the strategy, and any temptation for excess resisted. . It is sensible in these times of increased volatility to be prudent. I have never yet met someone who enjoys loosing money, irrespective of wealth! Perhaps Warren Buffet one of the most successful investors this century, summed it up well when he said when interviewed recently that," After a while the very act of stocks going up starts drawing in other people who get exited about the fact that their neighbour made some money, that"s when you get dangerous periods." Its emotion and sentiment not economic theory that drives markets. The stock market is the thermometer not the barometer of the economy, and should be used as such. Once you have settled on a strategy, try and hire the best money mangers around. Very few people are capable of beating the herd consistently. Success in the worlds financial markets is about humility not arrogance. Jeremy Blatch is an Independent Investment Consultant and may be contacted at jb@global-investors.net in association with www.investors-forum.com helping those who need it.