Risk Profiling, Risk Management and Investments
by Eben Maré, Head of Fixed Income, ABSA Asset Management
IBM recently estimated that we generate approximately 2.5 quintillion bytes of data daily (one followed by 18 zeros – roughly the equivalent of 57.5 billion 32GB iPads).
The flow of information has had a profound impact on the financial markets and investors’ attitudes. Consider the following two statements:
- “Our favourite holding period is forever.” – Warren Buffet.
- According to the NYSE factbook, in the 1960s stock average holding periods amounted to around eight years – currently it is believed to be of the order of several days.
There are several interpretations one can draw from these two statements.
- Buffet’s quote refers to investment conviction and ignoring short-term ‘noise’.
- The NYSE factbook statement, however, is about flow of information, uncertainty, short-term goals, liquidity and changes in the investment landscape and investors’ attitudes to bearing longer-term risks.
Modern investors undoubtedly face a proliferation of investment products and ideas. However, they also benefit from the diversification afforded by liquidity in international stock, bond, currency, and commodity markets as well as the access thereto.
The flow of information serves to create liquidity in the financial markets – one could argue, however, that investors are prone to misinterpretation of information and the likely effects of current events on long-term investment outcomes. Take as an example the amount of confusion and anxiety that has arisen as a result of the so-called Brexit decision.
Another example would be the effects of zero and negative interest rate policies (so-called ZIRP and NIRP, respectively) currently maintained by many central banks – how are investors to calculate the long-term effects of policies which have served to elevate asset price valuations without delivering meaningful extra economic growth?
The effect of longer-term trends
Policies are one source of uncertainty but it is equally important to try to understand the effect of longer-term trends; interest rate curves are presently low in many parts of the world, this is partly reflective of low interest rate policies maintained by many central banks as referred to above, however, investor confidence and limited profitable opportunities have kept the so-called equilibrium real interest rate subdued.