August 2020

Sandy and Toby are back at pondering the world through our newly polished lenses at Efficient Frontier Investing, “EFI”. We remain as opinionated as ever, seeing the world in black and white and not in shades of grey. For those of you who were not acquainted with our past writings, we are direct with our views which may bristle a few feathers.

Here at EFI, we specialise in identifying risks, understanding their potential effects and then we try to find ways and methods to attenuate them. At the core of our thinking is The Markowitz risk/reward curve of Efficient Investing. We endeavour to bring our target investments to points above the Efficient Frontier by reducing implicit risks whilst maintaining expected returns.

EFI specialises in the upper right quadrant space of the risk/reward universe, i.e. the zone offering higher expected rewards for higher risk! We believe that one can’t manage the returns, as these are set by the markets; we focus on the risk side of the equation. The more risk there is, the more likely we are to find ways to attenuate some of it. When successful, we push our investment to a point above the Markowitz line. In our quest, we are guided by two mantras - the first, which we learned from Albert Einstein, who said “Making predictions is very difficult, especially about the future”. We don’t even try... The second is that markets are a mechanism that distils all available information into a single point, a price. Therefore, one should read the markets to anticipate the news, not vice versa.

Everyone is looking into the November US Presidential Elections. Trump or Biden? We know that it is almost sure that the winner will be one of the two; but what we can’t pretend to see, is what will be the effects on the market from either potential outcome. Do recall 2016. It was a quasi-certitude that Hillary would win. It was also “obvious” that if Trump would somehow come out ahead, it would be an economic disaster. The reality validated Einstein’s quip, our first mantra.

Many are bewildered by the rising equity markets, looking incredulously as prices for the equity indices maintain an upward trend in the face of frighteningly bad data; on the COVID 19 situation, trade uncertainties between the US and China, social unrest in the USA and elsewhere, huge unemployment statistics... and Greta, who doesn’t stop badgering us all about Global Warming. Wow, truly everything appears bad and worsening around us. Most people conclude that the markets are in a bubble. They are wrong. We say the markets are right as they are a dollar-weighted-discounting of the future. We watch the action and dare to expect better “tomorrows” than the news might lead its readers to expect. A price today is the present value of its future earnings; goes the theory. Art Seigel, a Nobel winner, points out that 90% of said price reflects what is expected beyond 2 years... the coming two years account only for 10% of the price... !

So now, what do we read in the markets? Firstly, let’s define “Markets” - for us, these are FX, bonds, equities and commodities. They are all interlinked by you, the investor. After all, it is the Investors who set market values. We are observing a clear outlook on inflation. Bond prices are high, i.e. yields are low. A clear view across the spectrum of issuers, that inflation is not only mute, it will not rise any time soon. Huge unemployment, low commodities’ prices and slow economies around the globe ratify the bonds’ view. And yes, we know that Ben Bernanke has retired, but now we know that Powell can fly the proverbial Fed-Helicopter very well indeed, in fact he carries even bigger bazookas than Ben...

We are believers in the power of Central Banks, specifically their ability to add funds to the system. We note that the Fed has “only” spent some 5% of its promised $3.2Tn, so much more is coming. We also note that US Money Market Funds have swelled by some $4Tn, which are likely to drip into the equity universe seeking some returns. Add water to a bathtub, and the level will rise. Add money to the system, prices will go up. Stay away from bonds, own equities in one form or another - Private

Equity or Public, listed stock. Be “choosey” in the sectors you invest into; away from Retail, Financials (banks, insurance etc.), far from Leisure and Travel. Stay in the rest... Technology, Biotech, Med tech and the likes.

We find these words of George Soros to be pertinent today, “Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected”!

Your thoughts on what is pertinent, and provoking are interesting to us and we gladly will try to address any such ideas and thoughts you send us.

We invite you to explore our website, and discover our risk-attenuated portfolio of products. If you would like to reach out to ask us questions or make comments, please do so on [email protected] or on LinkedIn and we will get back to as many of you as possible.