A Gryphon Op-Ed Series: Part 1 of 5
For those of us old enough to remember, this was the payoff line for a beer company claiming that they used only ‘pure’ ingredients in the manufacture of their beer.
Whatever your abilities pre-or post- consumption of their product, we strongly advocate that ‘keeping it real’ remains an integral part of any investor’s approach to investing and the decisions associated with wealth preservation.
Recent pension fund reforms have prescribed financial counselling for members thus enabling them to make decisions regarding their options on investing, as well as on resignation or retirement. Greater pressure and expectation has also been imposed on trustees, introducing greater liability than ever.
While this development is admirable and necessary, the investment landscape is a minefield for the uninitiated. For investors and trustees to have to make life-impacting decisions can be overwhelming, particularly given the language that the investment industry uses, the jargon casually tossed about, and the inside speak which should include a secret handshake because of its exclusivity. Conversations tend to be very technical – partly because of regulatory requirements and partly because there is an innate complexity that comes with making investment choices.
There is a tendency amongst some investment professionals to indulge the ‘bamboozle’ factors and perpetuate the adage that bulldang baffles brains.
However, Gryphon’s approach to investing is simple – simple to understand and simple to evaluate. Because of our many years of implementing our philosophy, we appreciate that there are certain fundamentals that any investor needs to understand and should always bear in mind when navigating this landscape. With this in mind, we have written a series of articles explaining this approach. We believe this can inform the constructive conversations that are necessary during the counselling process and will result in a more informed member base, who will then be empowered to ask the relevant questions regarding expected outcomes and become more involved in their own retirement destiny.
If clients can be counselled to manage their own expectations, the ride for all parties involved becomes more comfortable.
In this introductory article we assert that investors need guidance in becoming informed enough to be ‘real’ about two important things; 1) their own personality type, and 2) realistic prospective returns.
Personality type – know thyself.
“Knowing others is intelligence; knowing yourself is true wisdom. Mastering others is strength; mastering yourself is true power.” Lao-Tzu.
While this may seem a deeply philosophical point of departure from which to begin the journey into the world of investing, it is nevertheless critical in establishing the foundations on which this journey will be based.
Investors need guidance in addressing the following questions/concepts: What is their understanding of risk? How much risk can they stomach? How do they react to uncertainty? What is their expectation of certainty? How vulnerable are they to the drama of the world around them? How does investing make them feel?
While you might consider this to be the stuff of hippies and Capetonian beach bums, the statistics on the actual behaviour of investors in times of crisis and uncertainty undoubtedly demonstrates a lack of understanding of themselves and/or their intentions when it comes to investing.
Hence our advice: Make sure that your clients know the answer to the following questions and What is the purpose of making this investment? What do they hope to achieve? What is their timeframe?
Mastering oneself is essential, particularly if things don’t go as planned. The knee-jerk reaction of abandoning a long-term investment strategy must be avoided as an emotional response can cause serious damage to any personal balance sheet.
Self-knowledge is not what humans generally do best. And so, in knowing this, in order to ensure that we build long-term wealth, we need to be acutely aware of our weaknesses and fallibilities and then manage ourselves accordingly.
Very often we display complete confidence in what is only an opinion.
How certain are we of the assumptions upon which we are building our financial future?
How do I choose which fund to invest in? Should I rather choose an index fund and, if so, why and which one? What should I expect of a counsellor or an advisor? What can they do for me? What is the cost involved? How do I evaluate their performance?
This line of thinking will be unpacked further in later articles.
Inexperienced investors may want to extrapolate recent returns into the future, but these are in fact unlikely to be reflective of the long-term. Who actually reads the health warnings that ‘past performance is not a prediction of future returns’?
We believe that investors need to be encouraged to be rational about future returns due to the fact that markets, like life, are subject to the laws of nature and economics. Yes, equities offer the best option for inflation-beating, long term returns, but in reality, cash has outperformed equities over the last 5 years. This tells us that there is also a time not to be in equities. We believe it is easier, more reliable and consistent to add value through asset allocation rather than by stock selection.
Contrary to common thinking, Gryphon has demonstrated that dynamically allocating between asset classes has proven to be prudent as investors are protected from losing value for extended periods of time. Over time, and many cycles, the factors that most reliably drive markets have been identified, researched, implemented…and experienced in real life. What we’ve learned is that it is possible to reasonably consistently call the primary market cycles.
Growing and developing wealth takes time. In fact, time and the compounding of steady investment returns are the two essential ingredients for long-term investment success.
We need a realistic timeline, as Warrant Buffet supposedly said, “You can’t have a baby in four and half months, by making two women pregnant.”
Again, this supposition will be further elaborated on in later articles.