‘At the stock exchange 2 times 2 is never 4, but 5 minus 1’
These words of wisdom were uttered by André Kostolany, who also said ‘Investors just gotta have the nerve to accept and endure the minus 1’. This is precisely where the difficulty lies, as we know from our advisory activity. Very few investors can easily accept the setbacks associated with investment strategies with high equity exposure.
This is compounded by the fact that the really attractive long-term returns on equities can only be achieved if investors consistently invest.
One is also accepting a much higher risk, as equities exhibit a volatility of 15%-20%, which means that, in a very poor trading year (such as 2002/2003 and 2008), they can easily lose 40% or more. We see our most important task as working with you to determine precisely what your risk capacity is and deriving from that the investment strategy we should select together.
The only ‘free lunch’ in investing: diversification
Howard Marks, the founder and chairman of Oaktree, a major US asset manager, framed the sentence ‘If we avoid the losers, the winners will take care of themselves’ as the firm’s motto. This means that, when investing, the important thing is to avoid major losses. The added value we can create for you lies in the management of risk exposures. As the title of this section indicates, the only ‘free lunch’, i.e. the only thing you get for free when you invest is a reduction in the portfolio exposure through broad, intelligent diversification.
Our claim is to achieve your target returns with the least possible risk. We do not simply want to ‘play the markets’ but, instead, to protect your capital during periods of major stock market losses. We therefore aim to generate a return profile that achieves its objective with minor fluctuations in value.
Insurance-linked securities (ILSs) are a concrete example of intelligent diversification. Insurance risks, such as hurricanes and earthquakes, are unrelated to price developments on stock markets. They can therefore provide positive returns in times when traditional investments decrease in value, such as in the crisis year 2008 for example.
In our work as wealth managers, we are constantly on the lookout for intelligent forms of diversification, literally the next ‘free lunch’. They are a form of capital protection in a portfolio.