Evidence Based Investing

The markets are starting to exhibit signs of economic stress: from oil to stocks across the globe, investors appear to be in full “risk off” mode. One portfolio manager described the situation thus: “Credit default swaps continued to soar last week, particularly among European banks. Given that risks surrounding China and the energy sector are widely discussed, European banks continue to have my vote for “most likely crisis from left field…in the fixed income market, we wouldn’t touch low-grade credit at present [nor would we – only in our case it would be full stop]. Once credit spreads widen sharply, the default cycle tends to kick in several quarters later. The present situation is much like what we observed in early 2008, when we argued that it was impossible for financial companies to simply “come clean” about bad debts, because then as now, the bulk of the defaults were still to come.”

Contrarian Investing is an investment strategy that is characterized by purchasing and selling in contrast to the prevailing sentiment of the time.

Only when the tide goes out do you discover who’s been swimming naked.

[The following is NOT a forecast – according to some bookies, Corbyn has only a 14% chance of being the next Prime Minister. What follows is an unlikely potential scenario which would have a high impact on markets – a so-called Black Swan event] There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know. – Donald Rumsfeld Black Swan: An outlier event, with an extreme impact…

It hasn’t been a great period for all things Emerging recently. Predictably, analysts have turned negative co-incidental with the market falls. EPS forecasts have collapsed as this chart shows. As this article points out, however, that is a bullish sign for investors. Warren Buffet is often quoted as saying, “Be fearful when others are greedy, and greedy when others are fearful”, and this may be one of those moments. Meanwhile, aggregate Developed Market Bond and Stock valuations are at their highest level of all time, according to Deutsche Bank.

You’re not really diversified if you don’t hate something in your portfolio at the moment. – A Wealth of Common Sense, Ben Carlson 1/9/2015 Would you want to buy this market? We think that it can make sense… Source: Bloomberg One of the most important tasks in Long Term Investment is that of maintaining one’s asset allocation. Once a risk tolerance level has been set, one invests in a portfolio of assets, but that Portfolio will “drift” over time as the investments will generate differing returns. If stocks outperform bonds, for example, an original 60/40 (e.g. EBI 60) could morph into EBI 75 or even higher, which may be above the clients risk tolerance. The Tech bubble and subsequent crash will have pushed the Portfolio weighting above (and then below!) the client’s true risk level…