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Jan 1, 2016

The Times They Are A-Changin’

by David Ensor

David EnsorAs those of you who have read previous columns of mine will know, I belong to what one may call the “old-school, buy-and-hold” wing of the individual investor persuasion, taking the view that following the latest fad, or trading frequently is a ultimately a “mug’s game”, which merely enriches the intermediaries, or the so-called “professionals”.

However, coupled with that is the fact that I have been a risk manager for more decades than I now care to (or can!) remember. This means I am also somewhat paranoid about misjudging or misunderstanding a particular risk and thus failing to avoid an outcome that I should have, if I had been sufficiently well-informed and rational, foreseen.

So, given that an individual investor’s capital accumulation horizon probably starts at 40 to 45 years, and should almost certainly look forward 10 years at any one time (while being aware of the probability of short-term volatility as Mr. Market has one of his customary fits), it pays to re-examine and re-assess periodically whether one’s assumptions remain valid, or require adjusting. The eternal truths may not be quite as eternal as once thought.

In that light, I wish to highlight a few factors to which any individual investor should give serious thought, so that he or she can decide whether or not to adjust the content of and allocation to an investment portfolio.

Note that, while these may be complex issues, none of them is esoteric or “hidden”.

Firstly, climate change. That well-known Canadian Mark Carney, Governor of the Bank of England, recently gave a speech on this topic ( which bears reading in full, because it is a thoughtful public discussion of the issues that this still controversial topic raises, which will have an impact not just on governments and corporations, but on all of us. As the Governor pointed out, this risk not only requires dealing with the “tragedy of the commons”, but perhaps more importantly what he termed “the tragedy of the horizon”, meaning that the impact of climate change accrues slowly and also requires actions that will also not demonstrate their efficacy perhaps for generations. One might almost say that it requires taking the ultimate version of the “long view”! So, assuming that one believes that climate change is real, consider some of the potential consequences that may result from policy actions to curtail it: the concept of “stranded assets” will become better known, as the use of hydrocarbons (coal, oil and gas) will be curtailed as a matter of government fiat. This could mean that companies now seen as core components of an individual’s investment portfolio may go the way of the proverbial buggy-whip manufacturer. Of course, none of this is going to happen quickly, and perhaps not at all in our lifetimes, but it would be foolish to ignore the possibility and its consequences.

Secondly, the impact of China on the world’s economy. 7% annual real growth has now become 6.5%. Given the question of how real any Chinese government statistics are, how does one judge what is fact and what is fiction or fantasy, bearing in mind that the Chinese Communist Party will do almost anything to maintain control and stability? Certain items are more difficult to fake or “massage” than others, such as power consumption, the nature and scale of exports (such as steel), changes in the level of imports (such as coal, copper or iron ore), or changes in the sales of luxury goods. So, consider how such changes will have an impact on companies in your portfolio, and whether the rate of growth in China will inexorably decline over time as its enormous economy develops and changes. Looking at what happened in Japan in the 70 years after the Second World War provides an instructive economic comparison—as I said previously, one has to take the long view!

Thirdly, “unicorns”: Big Data and Artificial Intelligence. One could certainly argue that these are distinct themes, but in my view they are related and inter-connected, because they each depend upon the application of enormous quantities of computing power, flexible programming capabilities and understanding the extent to which human behaviour can and will be influenced and affected by their products. The term “unicorn” represents a fad and probably evidences a “bubble” in at least one sector of the technology investment sector. Many, if not most, will fail; others will be demonstrated to be frauds (or, more charitably, fantasies for the gullible). Only a few will become world-changers such as Google or Amazon. So-called Big Data are essential to the creation of many new businesses, as well as being tools to improve the management of existing businesses, so investors need to examine their portfolios for companies that are actually making use of these techniques and those who are simply pretending to. Artificial Intelligence (AI), whether in robotics, or in the form of machine-learning or algorithms, is changing the way in which many processes or jobs are undertaken, even causing the demise of hitherto “safe” high-paying manual work, as well as professional roles. The underlying issue here is the ability of entrepreneurs and businesses to adapt to change before being overwhelmed and rendered obsolete.

To sum up, I have given three examples of themes that may well have a significant impact on any investment portfolio over the medium to longer term—both positively and negatively. The key point is that any investor needs to periodically and regularly re-examine the assumptions that underlie his or her “worldview”, and decide how new factors, risks and opportunities should be integrated into it, so that wealth is preserved and capital continues to accumulate.

For myself, I do not believe “buy and hold” is necessarily redundant or incorrect, but simply assuming that ‘twas ever thus and always be so is likely to result in long-term underperformance if one’s portfolio is not adjusted to take account of new information.

You have been warned.

David Ensor is a Risk Management Consultant. He can be reached at