Sunday, August 15, 2010

Investors, listen to Charles Darwin...

"It's not the strongest species that survive, nor the most intelligent, 
but the ones most responsive to change".
Charles Darwin. 

This for sure also applies to managing your money and getting your asset allocation right.
I hope that there isn't any doubt that we are currently living through a period of massive global change.

Let me just list 3 key factors here that point towards a period of unprecedented change:
  • The Credit Supercycle in the G7 countries has most likely come to an end. There is a large debt overhang that needs to be corrected, and there has been government overspending and overpromising that will most likely be corrected as well, as recent austerity plans in the U.K. and elsewhere show.
  • Global economic and political power had been concentrated in the G3 and mostly Anglosaxon elite over the last 60 years. This is currently being redistributed: the rise of the BRIC countries and the establishment of the G20 make this structural shift visible. The fact that the Chinese government has become one of the largest holders of U.S. treasuries over the last 10 years should make us think.
  • Few people realize the disrupting effects of the Internet and its increasing global penetration yet.  The possibility to get access to any kind of knowledge within seconds, and also the ability to disseminate real time information through tools like Facebook, Twitter, etc. on a global scale and through networks of trust will have profound implications on business, politics, science and most likely also on religion.
At the same time, global assets are still structured, distributed and managed in a way and with methods that are a direct result from a couple of other key factors that had been in place for a long time:
  • The ideas of MPT (Modern Portfolio Theory): efficient markets, "rational investors", the homo oeconomicus, standard normal distributed asset returns, benefits of diversification between asset classes, etc.
  • A special kind of environment that has been dominated by the U.S. dollar as the global reserve currency and a de facto role of the U.S. Federal Reserve as the global central bank.
  • A special kind of environment with 30 years of falling interest rates and low inflation.
  • A unique government security, i.e. the U.S. Treasury Bond, that didn't default for about 100 years, something quite unique in the history of government finance. If one goes back through history there are very few governments that never have defaulted. This has instilled a false sense of security regarding the quality of these debtors.
 So if we go back to our initial proposition, i.e. that we are living in a time of extraordinary global change, then we need to ask ourselves if the basic foundations and concepts regarding investing our money are still correct.
We need to anticipate change and the effects of change and ask ourselves how this massive global shift of power, economic structures and information flows will most likely affect asset returns, their correlations and likely future growth rates.

Let us listen to what Darwin said: it is not necessarily the strongest who survive, but those most responsives to change.  

Compass Capital helps you to identify these changes and to position yourself accordingly.

No comments:

Post a Comment