Knowledge is the only tool that investors need to make profits

Dubai: Short and sharp this week in order to point out three brief but important points. This week's space is targeted at the investing layman and the "inexperienced investor"; it is definitely not targeting the professional. For, the one thing "investing experience" should provide is an understanding of risk.

Point one would be: if the world's biggest banks can get into trouble, any investment can. Point two: given that the big brands don't know everything, knowledge is the tool that produces the best performance expectation management. Point three: to understand that every underlying asset class has a risk associated with it.

Returning to basics for everyone below the "very experienced" levels has its uses, especially given the current global scene.

Highlights of that scene include: firstly, the sight of some of the world's biggest banks seeking out the sovereign wealth funds of the Middle East, China and Singapore. They needed bail-out money.

Secondly, the sight of the Societe Generale "rogue trader" Jerome Kerviel triggering the rounds of "black-humour" e-mails that usually accompany these events.

Thirdly, the sight of asset class price traumas in a number of capital markets because a little bit of short term negativity sets in within the US economy.

It's a back-drop that takes me to my starting point. The long habit of believing that the "big brands" get everything right creates the impression they are never wrong. They are sometimes wrong. They simply deal with disasters better because of their capital strength; the intensity of their supervision (internal and regulatory); and they have robust risk management systems and techniques. And still they get things wrong.

Prone to mistakes

This means all investment companies are prone to getting things wrong. The point a friend made about the number of "best advisers in the world" calling him up rings in my ears. It would be absolutely amazing if they never got anything wrong.

It's a point brought out under the so-called "Prudent Man Rule". It's a rule that acts as a framework under which Trustees look for generally accepted principals regarding their conduct. The Rule comes from observations made by Justice Samuel Putnam in 1830. An "Estate" became the subject of a lawsuit after the beneficiaries sued the Trustees for having been negligent because monies had not grown over a seven year period.

"Do what you will, the capital is at hazard", said Justice Putnam. Money doesn't have a "legal right" to grow.

That really helps the confidence of the investing public, I hear you moan. In times of strife, the only real comfort is knowledge. Ray Mears, survival specialist, seems to get around with a pen-knife (of course he doesn't travel by plane) and a bag of knowledge. As he puts it: "knowledge is the best survival tool there is - and of course, it doesn't weigh anything".

The key areas of focus for "knowledge building inexperienced investors" would be inflation plus the basic asset classes. Specifically, the inexperienced should focus on knowing what the basic assets are; understanding their risks, and understanding their benefits. Inflation or the rise in price in goods and services sets a minimum performance benchmark. However, it could be replaced by derivatives of price movements (deflation and stagflation for example). But the point is: you have to have that minimum benchmark. Ideally, it should be in your base currency, or the currency in which you expect to spend "matured" investments.

From there, the main basic asset classes are: cash, bonds, equities, commodities, property and collectibles. Hedge funds, alternatives, private equity, and all forms of funds, are essentially structures holding these basic asset classes at one level of complexity or another. Get to understand the benefits and risks of these asset classes and you are on a fast-track to understanding all products/ markets and risk issues.

- The writer is chairman of Mondial Financial Partners.