Don’t be blinded by risk perceptions — you could lose out
Market participants all want the same thing: the best possible return at the lowest level of risk. How you go about securing that, however, is often a source of disagreement.
While you might think investment is a black-and-white affair, the assumptions that you use to underpin your calculations can have a decided influence on your decision to invest — or not.
Of course, future returns are never certain (and even in fixed income markets, bond holders could default).
But add changing macroeconomic variables, irrational markets, unrealistic expectations and investor emotions into the mix, and getting to certainty becomes even more difficult.
No wonder many investors settle for the obvious answer — whether this is picking last year’s winner or simply following the crowd, which has invested in a combination of popular offshore stocks and cash of late.
Using such decision-making shortcuts can often lead investors astray, and while there are always risks to doing so, we believe the current market environment has elevated the risks of taking such shortcuts even more.
Markets have become bifurcated, with investors clamouring to invest in the strategies that have proved successful in the past, and so it becomes a self-reinforcing cycle, with popular winners continuing to win.
What is risk?
Risk is often defined as the potential to lose money, though it should also be viewed as the possibility that your return expectations won’t be met.
In a world of deeply divergent markets, the definition of risk for many seems to have shifted to the risk of missing out.
Exuberant and irrational markets create opportunities for patient investors who are prepared to look for the opportunities others are missing out on.
These are typically found in the uncrowded sectors of the market.
Currently, markets are defining risk very narrowly as the risk of missing out and more specifically, the risk of missing out on a repeat of the returns from a narrow subset of assets.
Risk assumptions affect how we view opportunity too.
Being careless about the assumptions that underpin your estimations of fair value and future returns will sway your investment choices.
Therefore, we believe that investors should be very clear about what their assumptions of the future imply, to minimise the risk of being disappointed later.
Perceived low risk assets like US government bonds are offering very little yield, while the S&P 500 is at generational extreme ratings.
Previously when the S&P ratings were in similar territory between 1998 and 2000, investors had to wait 13 years before seeing a capital gain (and weather two corrections of more than 45%).
With ratings already at such extremes, investors should question how much longer such conditions can persist — and what it could mean for portfolios if their underlying assumptions were proven wrong.
More worrying, however, is that current risk perceptions are blinding investors to the areas of the markets that do offer the potential for exceptional future returns, even when we apply currently very negative assumptions that underpin popular narratives.
Thus investors are not only investing into a very narrow subset of assets driven by a fear of missing out, but they are also avoiding investment into broad range of assets based on prevailing narratives that these assets are too risky.
As we methodically unpack the narratives around what is too risky, however, we often find they stubbornly overlook any mitigating factors, and are based on deeply held narratives of fear.
The risks of investing in SA government bonds are widely discussed (and potentially overstated) while the appeal of high yields and steep yield curves are overlooked.
SA Inc shares are all assumed to be write-offs based on poor economic prospects, when these companies have proven they can fare well despite the local economy and even when these companies do not depend only on the South African consumer and economy.
Yes, investors want the best possible return at the lowest level of risk, but this is dependent on your ability to correctly assess what risk is.
If you get that fundamental insight wrong, your ability to invest successfully in the long term will be severely compromised.
One of the myriad failures of SA’s education system — the post-1994 period — is a poor knowledge of civics and society. This lack of knowledge is especially acute when it comes to understanding the role and place of newspapers, and in particular, the difference between news reportage and opinion, and of investigative journalism.
It does not help, also, that we have politicians with access to social media, and who make for good sound bites, and to whose words people tend to hold on religiously.
The basic point, which any elementary civics course would drive home, is that newspapers, and the news media, in general, are a cornerstone of a functional democracy — such as ours.
It serves both to keep those in power in check, and to provide the factual reportage, and considered and informed opinion that would help people make informed decisions about politics and society.
One outcome of this lack of understanding is that concepts like neutrality, objectivity, and intellectual honesty bleeds from the news to opinion pages in the public perception.
It gets worse when individual editors or journalists are singled out (demonised and threatened with physical harm) for reporting on, or presenting opinions on politicians or public figures.
This is probably the most dangerous misunderstanding. Elected officials and officebearers are held to a higher standard of scrutiny than that public — because they (ideally) play a formative role in our future.
And so, if a news reporter refers to, say, Andile Lungisa as a convicted criminal, it is the truth. If a commentary writer says Julius Malema and the EFF are a danger to society, that’s just his or her opinion, but the writer has to explain, and provide a logical and coherent basis for making the claim.
There is a complete difference between day-to-day news reporting and opinion writing (columnists, like myself ).
A couple of years ago, a study in the US, “Americans and the News Media: What they do — and don’t — understand about each other” established that at least 75% of the public said it was “very” or “somewhat” easy to distinguish news articles, from commentary of opinion pieces.
“Only 43% of those polled said they could tell the difference on social media like Facebook or Twitter. The conclusion was that very many people were simply “confused”.
The problem is compounded in SA, where readers first check whether the writer is black or white, and then make up their mind.
In other words if a black person is critical of a white person, the black person is being divisive or a race-baiter.
If a white journalist is critical of a black person, the white person is racist, opposed to “black excellence” and has a “colonial” or “apartheid mentality”.
The vituperation gets increasingly noisy and dangerous when investigative journalists focus on a particular politician or political party.
The go-to response is “whataboutism” (you are critical of a black politician, what about a white business person, or FW de Klerk) the next response, which is laughable, is that the journalist is “obsessed with” the politician (or political party).
The fact is that if a journalist, or a newspaper, focuses on a particular situation or state of affairs, they are simply being thorough, and doing their job thoroughly.
Like researchers, they gather as many facts as possible, and may have to “sit on” a case for weeks, and even months.
One response to investigative reports Ace Magashule, was something like “if journalists think that Magashule has done anything wrong, they should go and file a complaint with the police”.
That is not how journalists work. Their job is to hold politicians (and powerful people in society) accountable, to expose ethical lapses, maladministration and corruption.
The columnist has the time to place all the above facts in some kind of context, draw comparisons, and reach his or her own conclusions — which may differ from one newspaper to the next.
This is an important distinction.
The newsmedia in SA has shrunk considerably in terms of readership and, unfortunately, in terms of “political alignment”.
There was a time, two or three decades ago, when the “mainstream” media were dominated by two companies, The Argus Group (now the Independent group), and South African Associated Newspapers, which has become Arena, publishers of The Herald.
We broke that stranglehold in the 1980s with the Weekly Mail, then came South, and the Vrye Weekblad.
That was when the “alternative” newspapers were born; and we were a lot more critical of the status quo, to the extent that some of us, individual journalists, including myself, were banned, arrested, beaten up or detained.
As things stand, today, there are two or three groups of publications, one of which is an online platform, that continue to do outstanding work.
As far as I know — and I have been in and out of this business since 1980 — not one of these “groups” support a political party.
Also, individual journalists (including columnists), often hold contending views.
The biggest problem (of this miseducation), is that South Africans still throw around concepts like “sell-outs,”“revolution,”“whiteness”, “privilege”, and racial preference/marginalisation, as explanation for everything or anything they disagree with.