Key Take-Aways from the 67th CFA Annual Conference Part II

In a previous blog, I labeled the four-day Global Chartered Financial Analysts event in Seattle as the ‘gold standard’ of conferences and seminars I’ve attended.  In this Part II blog, I want to share with you more key investment-related insights from the impressive slate of conference speakers.

1. Recent academic research clearly suggests that individual investors can realize better returns if they focus more on avoiding behavioral blunders and less on trying to achieve above-average returns.  This reaffirms my long-standing claim that focusing on the ‘Investor Self’ is a profitable high-leverage activity.
2. Arjun Divecha, Chairman of Emerging Markets for GMO, summed up his views by suggesting that “investors should never fall in love with a single emerging market, but rather should ‘date’ them and date promiscuously.”  Changing partners in this arena is healthy.  He also asserted that the most attractive long-term emerging markets were those that built solid institutions to survive the inevitable bad governments.  From his experience, being in the right countries and sectors matters far more than picking the best stocks.
3. Sheila Bair, the former FDIC Chairwoman, had an insightful line.  She said, “Complexity leads to people making mistakes.”  She was talking about the banking industry, but it also applies to investors trading methodologies and their investment vehicles.
4. Mutual funds with the highest alpha (i.e. out performance) tend to be young, smaller, nimble funds with no asset bloat issues, tend to outperform the markets by acting somewhat differently, and tend to be funds with a concentrated portfolio of high conviction stocks.  Low fees are an added bonus.
5. Economist Tomas Sedlacek made a number of interesting observations.  He started by asserting that you don’t solve alcoholism by coming up with a cure for the hangover – that would simply make alcohol more attractive.  From there, he went on to compare politicians to alcoholics.  For example, if you go out Friday night on an alcoholic bender, you expect to pay the price on Saturday morning with a whopping hangover.  But imagine if you could go out on a Friday night and the timing of the hangover would be uncertain.  It might hit you the next morning or perhaps not until Monday or Tuesday.  This is how politicians today are treating debt – not knowing when the consequences or the hangover will occur.  They are essentially on a Friday night debt-bender with the assumption that some other guy who comes along after them will have to endure the hangover.  Greece is a good case in point and sadly, they’re just 20 years ahead of the rest of us.
6. Sedlacek offered another economic insight.  If a country borrows 3% of GDP to grow its GDP by 3%, it’s a fallacy to claim it’s richer as politicians want you to believe.  But if you borrow 3% of GDP to grow say 7%, then you are indeed richer and you should use those riches to pay down previous debt – something that politicians seldom do.  What the US government is doing presently is to borrow 7% of GDP to grow only 3%.  Making debt a pillar of our economy is clearly a bad long-term deal.
7. Dr. Clint Laurent, who runs Global Demographics Ltd., deserves a shout-out and praise.  He told us they track data down to individual counties in China to identify pivotal demographic trends that could clearly impact investment returns if applied correctly.  He presented a powerful, essential and complicated analysis showing the changing age profiles, preferred consumption industries, productivity, investment and savings growth, housing and health expenditures for Asia and emerging markets.  For me, his analysis reinforced why I use expert managers and their mutual funds to invest in these sectors.
8. Nate Silver is somewhat famous for his political predictions that are based on polled data.  As an expert on Big Data, he pointed out that the more data you have (and today the data sets can be into the billions), the more opportunities to cherry-pick the information to prove literally whatever you want or need the headlines to say.  My takeaway from this is that the fundamentals can be collected, reported and interpreted in vastly different and self-serving ways.  He pointed out that the US government now publishes 148,000 different economic points – which can potentially generate over 21 billion combinations or relationships!  This simply buttressed my belief that the markets expressed behavior as reflected in my stock charts is the most rational analysis approach.  A lot of the rest is disinformation and noise.
9. Nate Silver also said that statistically the world is no longer driven by the 80/20 rule but more like the 95/5 rule.  His advice to improve investment returns had three components.  (1) Think probabilistically and remember that there is always a margin of +/- error.  (2) Know your own personal vantage point and where exactly you are coming from.  Often this becomes the weak link.  (3) “Err, err and err again but just less, less and less.”
10. Understand that this CFA conference was for institutional investors talking to their institutional peers.  Their presentations were not geared for individual investors.  Amongst this sophisticated group of professionals, it was eye opening to hear them talk about the perils of ‘alternative investments’.  They lamented that the promised upside often did not materialize or came up short.  In times when traditional asset classes are struggling, these alternative assets can easily go down in flames and not offer the promised diversification.  Clearly, the lesson for us individual investors is that the tried-and-true vanilla investments should be embraced as nothing to scoff at!

Trade well; trade with discipline!
-- Gatis Roze