Wednesday, July 13, 2016

Accept the investment environment - Just use the right tools to describe it, cases and scenarios


“Manage money for the environment that you are in, not the one you wish you were in.” 
  -from Jeffery Saut, Chief Investment Strategist at Raymond James 

"...you go to war with the army you have---not the army you might want or wish to have at a later time." 
-Donald Rumsfeld 

There are a lot of complaints from managers about the poor investment environment. Interest rates are distorting markets. Central banks are manipulating rates. There are asset price bubbles. There is too much market uncertainty. Yet, this is the world we live in and invest for. The manager has to battle the markets with the tools that are available although they don't have to be used in the same manner as the past.

I have always been a believer in using as much data as possible, but in this environment using long-term data prior to the financial crisis may not always be appropriate. The world was different. This difference is why it is important to use other decision-making tools to focus on specific situations of today. 

The use of cases or specific situations that may fit the current environment may be extremely useful. For example, with respect to the housing bubble in Canada, we can compare and contrast with other housing bubble events. There are similarities. Current bank crises can be contrasted with crises of the past. The key to this type of work is looking for both similarities as well as differences. Find uniqueness after looking for commonality.

Another alternative is the use of scenario analysis to draw impression of the future. A perfect example would be the scenario if rates go negative in the US. We have evidence from other countries and the threat is real. The impact will be different than just a rate decline.

Clearly, using cases and scenarios  as an investment tool is not new, but in a strange environment, they are all the more useful.

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