Dear Fellow Investors and Friends
Welcome to all the new subscribers! And to everyone else, of course. I really do appreciate you taking the time to read this.
Today is Thursday, the 9th of November, 2023. It is the 313th day of the year; 52 days remain. On this day in 1989, the Berlin Wall was opened, allowing people from East and West Berlin to move freely across the border which had been blocked since 1961.
Of course, most traffic moved in one direction – no prizes for guessing which!
More importantly, the Berlin Wall had been the symbol of the Cold War between communist Russia, its vassals and the free West.
The fall of the Berlin Wall was a tangible sign of regime change, driven by Glasnost (openness) and Perestroika (restructuring) in Russia. But change wasn’t limited to Russia – in the 80’s and 90’s, world trade and capital flows were being liberalised.
- The UK abolished capital controls in 1979 under Margaret Thatcher
- Glasnost in the mid-80’s
- The ASEAN free trade agreement was signed in 1992
- The NAFTA was signed in 1994
- South Africa abolished exchange controls in 1994
- The European Economic Area was established in 1994.
- China joined the WTO in 2001
All these developments led to more trade, higher global growth, lower inflation and a boom in stock markets.
It’s also interesting to note that long bond yields in the USA peaked in 1989, and the stock market started going up after having done nothing for 20 years post the collapse of the nifty fifty craze in the early 70’s. So, markets anticipated the regime change, which was happening slowly.
Another regime change happened around 20 years ago – the shift from desktop to mobile. Apple, under Steve Jobs, caught the wave; Microsoft missed it. In an interview at the time, Gates and Jobs were asked:
“The core functions of the device formerly known as the cellphone, whatever we want to call it now — the pocket device — what would you say the core functions are five years out?”
Gates’ answer was like that of so many experts trying to predict the future: he had some ideas and some inside knowledge of new technology but no real vision of what might come next.
Jobs’ answer was profound:
“I don’t know. I don’t know because I wouldn’t have thought there would have been maps on it five years ago. But something comes along, gets really popular, people love it, get used to it, you want it on there. People are inventing things constantly, and I think the art of it is balancing what’s on there and what’s not — it’s the editing function.”
That right there is the recipe for genuine innovation:
- Embrace uncertainty and the fact one doesn’t know the future.
- Understand that people are constantly inventing things – not just technologies but also use cases.
- The art comes in editing after the invention, not before.
To be like Gates and Microsoft is to do the opposite: to think that you know the future, to assume you know what technologies and applications are coming and to prescribe what people will do or not do ahead of time. It is a mindset that does not accelerate innovation, but rather attenuates it.
I found this interview so interesting because the same applies to investing. So many of us try to forecast the future – a la Bill Gates – and then build a portfolio around this forecast. And most people default to predicting macro events because it’s so easy to talk about. Whenever I speak to financial advisors, most often, the discussion devolves down to what the outlook is for the currency, interest rates, GDP growth etc.
The fact is, I don’t know. And neither does anyone else. The future will always surprise us.
As a thought experiment, consider how regime change would play out in SA politics. Yes, it’s what we are all rooting for, but what happens after? Who has power, and how much? Can they wield that power? How far would the unseated groupings go to regain power?
It’s very hard to predict what will happen after a political regime change in South Africa. It’s even harder to predict what happens after global socio-economic regime change.
The good news is – as far as investing goes – it doesn’t matter.
Rather than try to optimise a portfolio for the best return under a given forecast, I try to optimise a portfolio for a reasonable return under any future possible outcome. In my book, portfolio management is not to generate the best return possible, regardless of risk, but to take the least amount of risk possible and still generate a satisfactory return.
This is especially true in the current investment environment, as we are undergoing another regime change. These significant changes happen every 25 to 35 years. The Covid mania could be the Berlin Wall of this era.
We will only know for certain in the future, but the following could be regarded as pointers to barriers being erected to stem trade and capital flows:
- Supply chains, i.e. “re-shoring.”
- The war in Ukraine.
- Tension between China and the USA.
- The rise of the “Global South” in terms of the BRICS+ grouping.
- Resource nationalism, specifically with respect to the “clean energy transition”
If true, what would be the effects on markets? Again, I don’t know. But, as discussed in my note, Vol 1 No. 9, what worked over the past 30 years is unlikely to work over the next 30 years. Any investment strategy that aims to preserve wealth and grow it in real terms should be prepared for inflation, deflation, high nominal growth and a higher cost of capital, not necessarily in that order.
And many, many other unexpected – and unforecastable – outcomes.
In my book, the only way to deal with this is to run a diversified portfolio that includes assets that might not have been in favour historically but could protect your capital – and even benefit from – a regime change. Edit the assets that did well in the previous regime and add ones that can function well in the current regime. At certain times, this might look stupid relative to what everyone else is doing, but over time, it can lead to sleeping well and eating well.
And that is the best outcome possible, regardless of the macro-environment.