Resiliency management - Moving beyond risk management

 

McKinsey supported a comprehensive survey with The Federation of European Risk Management Association which focused on the pandemic and corporate resilience. A key take-away from the survey is that these risk professionals have shifted from focusing on a limited number of financial risks to a more holistic view focused on resiliency.

There is greater focus on resilience as core to the firm's strategic process with more emphasis on foresight capabilities in the form of scenario and stress testing. Resilience is another way of saying that a firm needs to be, as stated by Nassim Talib, anti-fragile. While often discussed at a high level, resiliency still needs to be more fully incorporated into firm thinking.

Resiliency looks beyond response to specific risks or shocks but how the firm can cope with stresses. There is a focus on the operational and technological challenges that are necessary when shocks occur. For money managers, there should be a change in focus from trading strategies to preparations on risk processes.

A greater emphasis on foresight skills and disruption and crisis response is not about a trade but how to prepare for what could be new opportunities. The foresight skills look beyond traditional risk analysis of volatility and focus on different scenarios that are not embedded in current or past prices. This is a highbred approach between pure quant and discretion. Scenarios require vision and not just computation. 

A good disruption and crisis response focuses on financial, operational, technological, organizational, reputational, and business-model resilience. Resilience can be a competitive advantage it is holistic. Since we may not know the future, we must be prepared for any contingency. Resiliency is a process.

Perhaps this is the rationale for hedge funds moving into a multi-strategy approach within a single platform. Provide the operational and organizational structure that can support alternative strategies which will do well in different environments. 

The Johari WIndow - what you know and what others know about you

 

The ancient Greek aphorism "know thyself" can be formed as a deeper matrix between what other know about you and what you know about yourself. This matrix has been called the Johari Window after the two researchers (Joseph Left and Harrington Ingham) who formed the model. There model helps to describe and understand our relationships with others. 

If your known self matches what is known to others, you are an open book. You are a transparent person. If you know yourself, but others do not you have a hidden personality. If others know you better than you know yourself, then you are blind to your own characteristics. What is unknown is what is not known by yourself or by others. 

This is all very interesting but may seem removed from investing. However, this can be viewed as variation on the Rumsfeld "known known" comment as applied to your relationships. From a game theoretic approach your knowledge of self and the knowledge that others have of you is very relevant. It highlights how others may trade against you and where you will potentially have weaknesses. Do you know yourself, and do others know you? Do you know your firm's trading style and do others know it? Does that provide an advantage or disadvantage? 

Is this the best gold can do for investors?

War, inflation, uncertainty, negative real rates, and overall uncertainty. If this is not the perfect conditions for holding gold, I don't know of any better. The price activity was morbid for the last year given the inflationary economic environment, but the market has moved from 1800 to 2040 in the last month.

Flows have not matched 2020 levels for the first two months of the year, yet it would be a clique to say that gold has lost its luster. We are still early in this geopolitical event. Looking at monthly changes since 1970 from the Gold Hub database, the month of March so far is in the 89th percentile and last month was in the 88th percentile, so the gold moves this year are significant.

Gold is outside money and is not a liability for anyone in the global economy. This is a significant characteristic that has been under discussed although we may be finding out that if you cannot sell gold in large quantities, it may not have the level of safety desired in a crisis; ask the Russian central bank.   Still, the safety of gold is being resurrected and investors should take note. 

 

The fallacy of misplaced emphasis and investing

 

... the fallacy of misplaced emphasis, the easiest and most pernicious fallacy for the historian to commit: what the historian says is true, but by failing to indicate its place in a larger context, he or she implicitly distorts its significance.

 - John W. O'Malley, SJ 

The same problem of misplaced emphasis can be said of investment analysts. It is not whether what you say is correct. It is whether what you say is important. Many analysts are good at providing details and giving extensive facts and figures. It is often impressive what you can learn from a good analyst, but what is critical information is much more relevant and harder to provide. 

This is like our discussion on confidence and accuracy. More information improves confidence but not accuracy. (See More information does not lead to improved accuracy.) Know what is important is more important than just knowing. 

Perhaps this is one of the reasons for being a trend-following. If had to ask for just one piece of information and nothing more, I would ask for direction of the trend. Any other information can be true but not significant.