Business | Investment
Smart investors will weather the storm
Attitude to performance determines survival in a global recessionary scenario.
- By Sean Kelleher, Special to Gulf News
- Published: 23:27 November 22, 2008
Let's start with next week's article: "Selling financial services in a recession". Starting with the sequel is rare, but this is the investment scene we are talking about and everything about it is rare at the moment. So here is today's point in a nutshell: If crisis is when the scared hand wealth to the brave, where do you stand?
Does your temperament see the investment glass as half full or half empty? The over reaching point is that the circumstances of today means that your attitude to performance will be critical. It means that there is no point in looking at today's "recession opportunities" if you don't understand performance mentality.
Performance winners can come from anywhere and everywhere. In 1967, Foinavon won The Aintree Grand National. Background stuff here: The Grand National is a horse race with massive jumps.
So not unlike today's investment world there are loads of variables: competition, lots of entries, the weather, stray horses, the handicap system ...
The 1967 event saw a tsunami-like, global crisis situations when a stray horse led to the entire field falling over or pulling up. It was mayhem. Yet there was still a winner.
There is a moral in there somewhere. Not least: there will be a winner. Plus, despite the mayhem, many will remount and also have a "great ride". Its difficult to see how guys like the Indian man-of-steel Mittal will not recover from some $34 billion of investment losses or that the likes of Warren Buffet or the Abu Dhabi Investment Authority who (because of their appetite for "long equity"), must be sitting on technical losses that re-define the word 'awesome' will also not recover.
They will re-mount and end up with a fairly satisfactory journey having learned a lot on the way.
Foinavon and investment performance? Here is the thing. If I have Dh10 million and my net worth (following a financial tsunami that hits everyone) is now down to Dh1,000, then my net worth has clearly fallen in absolute terms. However, if the rest of the UAE has a net worth of Dh500 per head and post the catastrophe, then I am something of a winner being the richest person around.
A Foinavon-like win. The point is: We are all in the financial meltdown scenario. A critical piece of the "what-happens-next" calculation will depend on how you use your head. Good non-herd-like decisions, and remember that Foinavon still had to negotiate the rest of the huge Aintree fences before winning.
Foinavon and the glass half-empty people? This week we focus on them. The main point to the half-empty-ites would be that you have to be in it to win it. Hoarding cash might have pangs of "common sense" given the unusual and scary set of events in our banking-system. However, it is fairly important that the half-empties see two issues: firstly that cash is a means of exchange and a store of value.
This can only change if capitalism fundamentally fails and if this happens you don't need the cash anyway. It means that, even in the good times, banks will give you an interest rate that is near the rate of inflation as this way you benefit from sustaining your purchasing power (but not improving your purchasing power and therefore not assisting in wealth creation).
Secondly, whatever short term bank deposit rates get to we need bank deposits to support the role of cash as a means of exchange. Short term, there are a few banks that are "buying cash" by paying better than the rate offered by the lenders of last resort. Whatever the reason, the economy at large will need its cash to revert back to its normal role as a means of exchange otherwise the economy falls into barter and we are back to the end-of-capitalism scenario.
Furthermore, for the half-empty-ites, it might be worth noting J.K Gailbraith's comments on The Great Crash of 1929, who observed: "Far more important than rate of interest and supply of credit is the mood.
Speculation on a large scale requires a pervasive sense of confidence and optimism and conviction that ordinary people were meant to be rich". It's an observation that leads this month's IFS School Of Finance, Financial World, to conclude that the biggest issue we are dealing with today is MOOD.
"It is the mood that has fundamentally changed and this change is why, though governments may pump money into banks, share prices are still weak. It is why central banks are cutting rates but Libor is staying put. It is also why, despite public money to provide liquidity to markets, to guarantee bond issues and even to take stakes in banks, stock markets continued to drop like so many stones".
The message to the half-empty-ites is therefore complicated. Firstly, you have to be in it to win it. But in what? You might be right to be (partially) out of markets associated with mood and temperament in the short term but remember when the mood is good the upside is good.
Secondly, that you can enter non-sentiment driven markets; but whatever you do limit the cash holdings to an amount that serves its principal role as a means of exchange and a store of value. Keeping everything in cash is one of the poorest decisions around.
- The writer is Chairman of Financial Partners and Mondial.
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