Authored by Dave Murray
I’m privileged to have had a long career in sell-side research – tasked to deliver analyses and views for professional investor clients, preferably with definitive and high conviction conclusions. Human nature, even amongst experienced investment professionals, craves certainty and unambiguous outcomes. Similarly, Daniel Kahneman’s work describes how our human brain naturally defers to the least demanding mental effort, preferring familiar, certain answers over unexpected and less certain outcomes. Despite our indisputably uncertain world, investor certainty remains an enduring obsession – one that merits reflection.
It is perhaps easier to start this reflection with what is (more) certain. It is an absolute certainty that no investor/advisor can consistently predict the future. Forecasts tend to become less certain the further out in the future they project. Curiously, investors/advisors reflect absolute confidence in predictive powers when looking in the rearview mirror and explaining past outcomes. And confidence increases the further back in history they go! This contradiction between what we know and what we do/say, together with our default to simple heuristics and biases, results in investors’ natural tendency to overestimate our forecasting abilities.
We are certain that fundamentals are critical drivers of asset performance and investor returns. Current fundamentals matter, but performance is more dependent on what happens to future (uncertain) fundamentals; technical, flow and sentiment influences (e.g. event, fad/social trend drivers, seasonal effects) can also dominate as drivers of asset performance and returns. Indeed, behavioural finance is accepted as a legitimate and valuable scientific discipline for investors/advisors. To further challenge certainty aspirations, expectationsurprises are often the most powerful asset price drivers. Ironically, it’s the uncertain, unexpected outcomes that often determine investment performance.
It’s debatable whether investment markets are less certain today than they were in the past. The Trump presidency has clearly elevated socio-political tensions and distrust, resulting in increased policy uncertainty and global market volatility. As a colleague cynically reflected “maybe Trump provides greater certainty – we can now confidently expect the unexpected”. It is widely accepted that technology advances and real-time information availability have super-charged the pace of change. Although investment uncertainty (i.e. the inability to predict outcomes due to unknown factors) cannot be reliably measured, barometers surely sensitize in times of higher-paced, uncertain change.
Another unavoidable certainty is that we will age. One of the few benefits of ageing is deeper/wider experience and the advantage of having made more mistakes to learn from.
Ageing also implies the revaluation of time and energy – both are in shorter supply and therefore increasingly valuable. From an investment perspective, this implies growing urgency for investors to limit their time/energy (and capital) allocation to opportunities with appropriate risk/return characteristics AND that fit into a holistic and adequately diversified personal investment strategy.
SWAN Wealth Management investment philosophy respects the inherent uncertainty of investment outcomes: we focus on optimizing net return opportunities within appropriate levels of risk. Responsibly navigating uncertain outcomes whilst appreciating scarcity of investor time and capital is reflected in many of our investment philosophies and processes:
- we spend no time on public market stock picking; we see it as relatively low value use of our time; there is a reason why most active fund managers underperform benchmarks
- we treat all forecasts with less reverence – they are uncertain and demand wide ranges to be used constructively in risk/return models. Point forecasts carry serious health warnings
- we are attracted to sustainable, balanced return objectives as opposed to shorter-term extreme return objectives – “too good to be true” is timeless
- we prefer investments that accumulate and compound over time, without the need for high frequency transacting costs/time – (15% IRR over 5yrs equates to >2X your investment and >20%pa simple return)
- we apply more time to risk management than to return forecasting
- we like real assets in a portfolio; they went out of fashion as tech, crypto, NFT’s made headlines. They deserve a meaningful place in any medium/long term portfolio
- private markets present superior Alpha opportunities thanks to lower competition/efficiency characteristics; they don’t share the extreme concentration risk of public markets
- diversification always matters; it matters more as levels of uncertainty/risk increase
- we invest in markets, industries and organizations where meritocracy and free market thinking is encouraged, efficiency is still a KPI and investor rights/governance upheld
- our partners’ interests align with investors and integrity is everything; fund co-investment is a core principle
Certainty of investment outcomes is not a realistic aspiration. We champion deliberate investment focus, disciplined processes and patience as meaningful investment uncertainty mitigants, particularly during periods of extreme market uncertainty.
Risk Declaration and Disclaimer
The information provided by SWAN Wealth Management (Pty) Ltd is for general informational purposes only and should not be interpreted under any circumstances, directly or indirectly, as financial or investment advice, an offer to sell, or a solicitation to purchase any securities or investment products. Past performance does not guarantee future results, and investors should not base their investment decisions solely on historical performance, as it may not be indicative of future outcomes.
RISK:
The Actively Managed Certificate (AMC) on the SWAN US Private Real Estate Investment Opportunity (ISIN CH1276874281), listed on the Swiss Stock Exchange (SIX), is a private investment with specific risks, including but not limited to:
- Unregulated Investment: An AMC is not a collective investment scheme. It is an unregulated investment, meaning it falls outside the purview of the South African Financial Sector Conduct Authority (FSCA). Investors should be aware that, as an unregulated investment, the AMC does not offer the protections associated with regulated financial products in South Africa.
- Liquidity Risk: Investing in this AMC may involve liquidity risk. Due to the nature of the underlying assets or market conditions, it may be difficult to sell or liquidate the investment quickly without affecting its market price. Investors should assess their liquidity needs before investing in the AMC, as accessing funds may be delayed or restricted.
- Investment in Unlisted Assets: The AMC invests in unlisted real estate assets, which may have limited liquidity and longer investment horizons. These assets may present valuation uncertainties compared to listed securities.
- Market Risk: The value of the AMC can fluctuate due to changes in market conditions, economic factors, and political events, which may impact the value of the underlying real estate investments.
- Credit Risk: There is a risk that issuers of securities or other financial instruments in which the AMC invests may not fulfil their obligations, leading to potential financial losses.
- Interest Rate Risk: Fluctuations in interest rates may affect the value of real estate investments, as they can influence the cost of borrowing and property values.
- Regulatory and Legal Risk: Changes in laws, regulations, or government policies can impact the real estate market and the AMC’s operations.
- Foreign Investment Risk: As the AMC focuses on US real estate, investors are exposed to risks associated with foreign investments, including currency exchange rate fluctuations and differences in accounting and taxation policies.
It is recommended that investors seek independent financial and legal advice before making investment decisions.