Four Takeaways from a Chief Investment Officer
When I was invited to a closed door session with the Chief Investment Officer from one of the major banks, I immediately jumped on the opportunity! I wanted to understand their investing approach and market projection into the future. For confidentiality sake, I will not be naming any banks or anyone. However, the sharing were very insightful and I learned some key lessons. I hope it will be useful for everyone.
While I am a retail investor and managing a small (super small) fund for my family, I am always keen to find out what are the Big Boys (i.e. the big banks and institutional investors) thinking. Because these Big Boys have much more resources than I do so they cover a wider range of topics which I may have missed. More importantly, it is always useful to listen to different perspectives.
- Impossible to Predict the Near Term – The CIO was very candid and frank. The CIO admitted that predicting the near term market situation is very difficult. In fact, almost all of their initial projections for 1st half of 2018 were wrong! The reason was no one could have anticipated the trade wars started by Donald Trump. Therefore, my main takeaway is retail investors shouldn’t even try predicting the near term market situation because even the big banks with their enormous resources could not predict it accurately.
- Be Careful, We Are in A Late Cycle Rally – The market has been rising for almost 10 years and the valuations are high. However, the market prices have been rising to all time high with no sign of slowing down. Hence, they categorised it as a “late cycle rally”. In the near term, they don’t foresee any impending correction coming as there is not obvious sign of any slowing down in economy. I agree with their category of “late cycle rally”, but I would caution against too much optimism, even for the near term. Just recall 2008/9, why did most people miss the “obvious signs” of a crash that led to the Global Financial Crisis? Because these signs were only obvious on hindsight! There was a sense of complacency in the housing mortgage which blinded everyone from the unsustainable debts. Honestly, I won’t be surprised if the next crisis happens in the next 6 months because we are already in all time high, and I rather be careful and not be caught with my pants down.
- Concerns About Trade Wars – Much was spoken about the trade wars and its potential impact in the market. One key point was to look at companies with products and services that are penalised by the trade war as the earnings of these companies are likely to suffer. This also boils down to selection of companies, if the company relies solely on China or US market for their sales, that concentration risk is now very real.
- Sentiments Drive the Pricing of Equities (Stocks) – It was presented that the price of stocks is a result of their future earnings and the discount rate. However, if these are the only factors, the market should not have so much volatility as we are seeing now. Market sentiments drive a significant proportion of the stock prices, and if investors can see through these sentiments, investors will have a better opportunity to invest when the prices are driven lower by pure sentiments, instead of deteriorating fundamentals such earnings or discount rate, as sentiments are often temporary and soon the prices will correct itself to the fundamentals again.
Overall, I think my discussion with the CIO was very insightful and gave me a glimpse in their investing approach. I was once again reminded of a quote:
Do not fight the giants, dance around them instead.
The gigantic resources behind these big banks put them in a very strong position to joust for the best competitive edge in macro investing (predicting markets, interest rate etc.). Therefore as an retail investor, I choose not to fight with them directly but dance around them instead. Find areas of investment which they are not looking into. These areas could be too obscure or simply too small for them. But these areas would be perfect for me. Since, not many people are researching in them hence I could have an edge and secondly, the small fish is just nice for my super small fund!
Lastly, my sincere thanks to my good friend who brought me along! You are awesome!
