Hope Is Not an Investment Strategy
Published: October 23, 2013 (Issue # 1783)
This year’s Nobel Prize for Economics was awarded Oct. 14, to a trio of U.S. economists credited with contributing to the understanding of long-term asset prices. To anyone awake who is involved in the real-world allocation of money for investment in equities and other publicly traded securities, this news was alarming. If the Nobel committee really wanted to acknowledge expertise in portfolio management, it would have done better to give the award to almost any Russian investor.
It is true that the winners — Robert Shiller, Lars Peter Hansen and Eugene Fama — have contributed greatly to the theories that continue to underlie common investment processes. But in the post-crisis era, it is time to question the legitimacy of some of the founding blocks of theoretical asset pricing and investment planning, which were based on rational, efficient market theories. For their part, Russian investors put less focus on theory and statistics and often come away with a more rigorous intuitive strategy.
The asset management industry in Russia is on the cusp of a massive expansion as government incentives and crises in the Old World, most recently the threat of default by the issuer of the world’s global currency, reduce the attractiveness of parking money offshore in foreign-currency holdings. With this in mind, it is essential that Russia’s leading investment management firms develop effective post-crisis investment solutions, rather than being swayed by the biases of Western economists who have made very mixed contributions to what might well be called the “impossible science.” Russian asset managers might consider starting with a clean sheet and building solutions based on the actual dynamics of asset prices. This is what their clients already do.
As the world globalizes and computers grant us easier ways to trade and to monitor investments, it is perplexing that the Nobel committee has again endorsed the rationale of allocating a part of your savings to equities and a part to bonds, then gradually shifting the weightings as you age. True, this strategy remains the standard in the developed world, but it has singularly failed to provide savers there with wealthy, stress-free retirements. This investment theory was invented in the 1950s and 60s and has been thoroughly debunked by the markets of the past 13 years, which have yielded investment returns starkly at odds with expectations.
Russian investors have a different approach. Their experience of liquid capital markets is far more limited. Remember that the RTS Index is less than 20 years old. But they have already lived through a series of crashes and crises. As a result, many wealthy Russians reject Western investment models, but interestingly they adhere religiously to the most important investment principals: They buy cheap and sell at higher prices. This approach may sound obvious, but it takes unbelievable patience and even then it is incredibly difficult to achieve. Russians are highly risk averse, but they buy risky assets in times of turmoil, a logical combination of characteristics that Western banks systematically fail to understand.
Pages:  [2 ]