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The future of investing: A personal perspective

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Warren Buffett, the single most successful investor in history, has learnt both from the mistakes others have made in the past and those he has made himself.

MY father once gave me a sound piece of advice: "The one thing you can bank on is that no one ever learns from History".

Where possible, I have tried to adopt this philosophy along with other more accepted guiding principles in administering my family's portfolio, including taking a long-term passive investment strategy and managing risk using portfolio theory. Recently, however, I have found myself questioning if such a traditional approach is still warranted in an investment environment that is evolving at such a pace that even other sources of investor reliance such as investment advisers, auditors, regulators and market exchanges are struggling to remain relevant.

There is no doubt that through other periods of rapid change or uncertainty, investors' belief in basic economic principles has remained generally intact: The Industrial Revolution, World War I, The Great Depression, World War II and The Global Financial Crisis to name but a few.

However, has there ever been a time where the disruption has been so rapid, fundamental or dramatic as to put this very belief into question?

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The environment we now face as investors results from a multitude of factors which may or may not be mutually exclusive which include but are not limited to the following:

  • The current political turmoil existing in the major established world democracies such as the US, UK and Europe where the traditional platform of centre left or centre right under which markets have prospered are no longer a given.
  • Global conflict where despite the ever-present threat of physical exchanges, the more likely battleground will be fought on economic terms, most recently exemplified by the ongoing and spreading trade disputes between nations.
  • The growing trend towards short-termism where business and as a result, investment decisions are measured in months and quarters rather than in years and decades.
  • Information, where both the quantum, range and availability have grown to such an extent that the ability to digest, interpret and assess reliability is becoming virtually impossible. This even applies to data specified by corporate disclosure requirements dictated by the various accounting standard boards.

A case in point is what is now the obligatory 200+ pages in any publicly available set of annual accounts. Even as a Chartered Accountant, ploughing through the voluminous details of an annual report no doubt leaves me better informed, but does it really help me understand how well the business has or is likely to perform?

The issue of the reliability and relevance of information is compounded by the advent and development of MRC (Mass Rapid Communication). This not only facilitates sub-second trading but enables the real-time distribution of both quality and questionable information often at the same time. Fake news does indeed impact on markets and investors.

Technology is also disrupting both markets and industries, and hence investors. I can still remember with some nostalgic fondness, when sticking out your hand to hail a taxi was the only option, something my son now regards as being nothing less than prehistoric.

There is an influx of new opportunities that use platforms, products and markets, many of which remain beyond my comprehension. Again, I remember when options were used as hedges to ensure price certainty and stability in physical commodity markets. Now, shares, currencies and crypto currencies are treated like commodities and are traded frequently using derivatives such as binary options.

If like me, you are lost at the first mention of crypto, what hope is there for us mere mortal investors?

As a result of many of these factors, there has been an inevitable call for increasing market regulation and oversight, in part to protect investors. There are however, legitimate conflicting views on whether the current regulatory framework is, or isn't effective, and indeed some point to its very existence infringing on standard market operations.

All this at a time when investors are showing an increasing appetite for both risk and leverage partly resulting from an unprecedented period of low interest rates which has amplified the overall impact of the factors mentioned previously.

Taking this together, could lead a cynic to conclude that the ordinary investor faces a "Perfect Storm", where the degree of uncertainty makes trying to evaluate an investment proposition no different from studying the previous form of a horse on a race card.

From my own perspective, I am a little more circumspect and will attempt to adapt to the new environment we face by adopting a more specific and proactive approach to address short-term prevailing market conditions, while aiming to become more effectively and efficiently informed on the decisions I take.

I believe that such a strategy despite being different from what I have been doing, remains consistent with my fundamental principles which also includes investing only in vehicles, products and businesses I understand.

CONCLUSION

In support of my traditionalist views, despite my current misgivings, there is still one person I can point to where the old principle of investing in good underlying businesses with strong cash flows is still a thing of beauty. He is of course Warren Buffett, who remains the single most successful investor in history. He clearly has learnt both from the mistakes others have made in the past and those he has made himself; so, as the adage goes, there is always one exception that proves the rule.

However, for how long will the "rule" be applicable? Or, will it be our children and grandchildren who look back and remark on our own inability to learn from history and proving another well-known adage that indeed you can't teach an old dog new tricks.

  • The writer is a private investor and member of ICAEW.