2020 Outlook: A winning strategy
After 10 years of bull markets and one of the longest economic cycles in history, many investors refuse to think that the situation has changed; and that the most appropriate equity investment model has therefore also changed.
The human mind is designed to think that a certain period of time in the future will be similar to that same period of time in the past. For example, we all naturally tend to think that the trend and behaviour of financial markets over the next 10 years will have some consistency or similarity with their behaviour during the last ten years.
The underlying reason for this way of thinking lies in the nature of human beings and their need for survival. As animals, we tend to extrapolate the past into the future. We identify patterns of behaviour that result in success or failure; and we do the same for assets, companies and economic agents to follow, adopting them as a reference, or penalising and trying to avoid them.
That is the basic reason why it is so difficult for us to obtain returns on financial assets. As a group, we tend to buy and reward what has been a success (and possibly is expensive) and to look down on what has not turned out so well (and is possibly the cheapest). Likewise, we tend to think that the best investment strategy for the future is the strategy that has worked best in the past.
Market dynamics have changed completely
In light of the above, we think that we may be at one of those points in history where the future (the next 10 years) in equities does not look anything like the past.
The previous years have turned out to be bullish, with volatility under control, and the best investment strategy was to buy and hold; we think the years ahead could be lateral or bearish (depending on the sector or geographic area), with high volatility, in which the best strategy is active medium-term management.
And we have already adapted our portfolios and management models
The investors who understand this rationale and adapt their investment model to the new reality will be able to obtain extraordinary returns; while those that continue to apply the models of the past may experience significant losses with high volatility.
That is why our discretionary management products have abandoned previous patterns and adapted to this new reality in order to achieve their full potential in the coming years.
We believe that there will be excellent investment opportunities in the years ahead, but it will take flexibility, forcefulness, and management know-how to take advantage of them.