“China is in deep trouble”; “China is recovering”
“All hell is breaking loose with the trade war”; “We are very close to a trade deal”
“Brexit on March 29th”; “Brexit is postponed”
“Modi’s chances of reelection have been reduced significantly”; “Modi is expected to win reelection”
“Trump will be out of Office by the end of the year”; “Trump’s reelection chances are now boosted”
“The last quarter of 2018 was a pure bloodbath”; “The best first quarter of the last 30 years”
Welcome to Purgatory. More than 30 years ago, I read Peter Kreeft’s book titled “Between Heaven and Hell”. In a marvelous and outstanding narrative, the author places three famous persons — who happened to die on the same day — at the gates between Heaven and Hell. On November 22nd 1963, President John F. Kennedy was assassinated. On that very day Aldous Huxley, the famous author of the “Brave New World” died too. And the famous C.S. Lewis also died that same day. Three giants who represented three different philosophies are meeting in Purgatory and are debating the essence of their philosophies. It doesn’t get any better than that!
When we look at the recent markets’ behavior (both equity and debt markets) we may see signs of confusion, misdirection, elevated risk, rising uncertainty, and lack of conviction. This might be a symptom of an investment strategy that focuses on scale (e.g. factor-based strategies such as Smart Beta) rather than total return. Investing using mainly factors (such as momentum or low volatility) as the guiding principle may ignore the alpha that could be acquired when an asset-seeking perspective that awakes dormant capital is, or should be, the guiding principle.
If indeed we are in a market purgatory, then securities are guilty until they are proven innocent. In addition, in such a case diversification (like that pursued by smart beta strategies) may lead to dilution of alpha. Moreover, when particular strategies become very popular and overcrowded, the future is ignored for the sake of the present, and that could lead investors to miss emerging opportunities which not only can produce alpha, but at the same time ignore quality (with the latter we mean a combination of valuation, earnings growth, and financial strength).
As we ponder asset classes and future returns, we cannot escape a fundamental question: At what point does an existing industry start losing value due to the emergence of new technologies in the particular sector?
If this question is helpful in guiding the future of our asset allocation and assists us in positioning portfolios for future earnings and alpha, then we could use the energy sector as an example. The transition from firewood to coal changed everything in the midst of the 19th century. The transition from coal to petroleum also changed the dynamics of growth and earnings in the 20th century. Could it be that renewable energy sources could revolutionize the way we do business in the next 10-15 years? If wind and solar represent today 45% of the growth in energy supply for the production of electricity at a time when their costs are dropping by about 20% per year, then we should pause and question our energy asset allocation. If demand for fossil fuels drops significantly in the next 5-6 years, then the impact on the financial markets (and not just on those fossil-fuel companies that fail to adapt) could be huge and prices of related assets may never recover. Could it be then that investments in pipelines, tankers and undersea exploration will be unrecoverable?
Let’s also briefly review the evolving dynamics in health care and genomics. It was just reported that scientists were able to revive pigs’ brains four hours after death! The scientists were able to halt the death of brain cells and even restored some connections to the brain.
People not only live longer (in about 20 years we expect to have close to 2.3 billion people over the age of 60), but also seek treatments that will advance their quality of life. DNA sequencing tools and instruments are at the center of the genomics revolution. More than 2.5 million human genomes have been sequenced, and the number is expected to hit over 70 million in 3-4 years. The cost of DNA sequencing is expected to drop from $1,000 nowadays to less than $120 within three years. Gene mutations are precursors of diseases, and hence sequencing has tremendous value in prevention. Moreover, gene-editing therapies are an evolving and much promising field especially in the area of blood disorders.
We chose to leave aside and not comment on one of the most promising and evolving sectors: technology, where the sky might be the limit.
Investing for the future goes through the riviera of purgatory. For those who haven’t read Peter Kreeft’s book, I highly recommend it.
Echoes from the Riviera of Purgatory: Investing for the Future
Author : John E. Charalambakis
Date : April 17, 2019
“China is in deep trouble”; “China is recovering”
“All hell is breaking loose with the trade war”; “We are very close to a trade deal”
“Brexit on March 29th”; “Brexit is postponed”
“Modi’s chances of reelection have been reduced significantly”; “Modi is expected to win reelection”
“Trump will be out of Office by the end of the year”; “Trump’s reelection chances are now boosted”
“The last quarter of 2018 was a pure bloodbath”; “The best first quarter of the last 30 years”
Welcome to Purgatory. More than 30 years ago, I read Peter Kreeft’s book titled “Between Heaven and Hell”. In a marvelous and outstanding narrative, the author places three famous persons — who happened to die on the same day — at the gates between Heaven and Hell. On November 22nd 1963, President John F. Kennedy was assassinated. On that very day Aldous Huxley, the famous author of the “Brave New World” died too. And the famous C.S. Lewis also died that same day. Three giants who represented three different philosophies are meeting in Purgatory and are debating the essence of their philosophies. It doesn’t get any better than that!
When we look at the recent markets’ behavior (both equity and debt markets) we may see signs of confusion, misdirection, elevated risk, rising uncertainty, and lack of conviction. This might be a symptom of an investment strategy that focuses on scale (e.g. factor-based strategies such as Smart Beta) rather than total return. Investing using mainly factors (such as momentum or low volatility) as the guiding principle may ignore the alpha that could be acquired when an asset-seeking perspective that awakes dormant capital is, or should be, the guiding principle.
If indeed we are in a market purgatory, then securities are guilty until they are proven innocent. In addition, in such a case diversification (like that pursued by smart beta strategies) may lead to dilution of alpha. Moreover, when particular strategies become very popular and overcrowded, the future is ignored for the sake of the present, and that could lead investors to miss emerging opportunities which not only can produce alpha, but at the same time ignore quality (with the latter we mean a combination of valuation, earnings growth, and financial strength).
As we ponder asset classes and future returns, we cannot escape a fundamental question: At what point does an existing industry start losing value due to the emergence of new technologies in the particular sector?
If this question is helpful in guiding the future of our asset allocation and assists us in positioning portfolios for future earnings and alpha, then we could use the energy sector as an example. The transition from firewood to coal changed everything in the midst of the 19th century. The transition from coal to petroleum also changed the dynamics of growth and earnings in the 20th century. Could it be that renewable energy sources could revolutionize the way we do business in the next 10-15 years? If wind and solar represent today 45% of the growth in energy supply for the production of electricity at a time when their costs are dropping by about 20% per year, then we should pause and question our energy asset allocation. If demand for fossil fuels drops significantly in the next 5-6 years, then the impact on the financial markets (and not just on those fossil-fuel companies that fail to adapt) could be huge and prices of related assets may never recover. Could it be then that investments in pipelines, tankers and undersea exploration will be unrecoverable?
Let’s also briefly review the evolving dynamics in health care and genomics. It was just reported that scientists were able to revive pigs’ brains four hours after death! The scientists were able to halt the death of brain cells and even restored some connections to the brain.
People not only live longer (in about 20 years we expect to have close to 2.3 billion people over the age of 60), but also seek treatments that will advance their quality of life. DNA sequencing tools and instruments are at the center of the genomics revolution. More than 2.5 million human genomes have been sequenced, and the number is expected to hit over 70 million in 3-4 years. The cost of DNA sequencing is expected to drop from $1,000 nowadays to less than $120 within three years. Gene mutations are precursors of diseases, and hence sequencing has tremendous value in prevention. Moreover, gene-editing therapies are an evolving and much promising field especially in the area of blood disorders.
We chose to leave aside and not comment on one of the most promising and evolving sectors: technology, where the sky might be the limit.
Investing for the future goes through the riviera of purgatory. For those who haven’t read Peter Kreeft’s book, I highly recommend it.