CASPARUS TREURNICHT – Portfolio Manager

MEGAN FRASER – BD & Marketing

July 2022

Any parent of a small child will appreciate the bliss and benefit of a good night’s sleep. A book worth reading that explores and unpacks the science behind this is Matthew Walker’s “Why We Sleep.” While some old-school die-hards think that hard work (and only hard work) brings success, and that sleeping for more than 6 hours a night could be interpreted as lazy, research provides a different view.

Studies show that sleeping less than the recommended 8 hours a night immediately contributes to a suboptimal state of mind and a decline in productivity. Sleep is essential to getting your circadian rhythm right and is therefore key to a healthy and optimally functioning brain. The science of sleep is now getting the attention it deserves; severe sleep complications and aspects related to ineffective sleep is now considered a borderline mental illness…and that’s besides the effect of being the parent of a toddler.

It’s probably not unreasonable to assert that current market conditions are a major cause of sleeplessness. Further, it’s probably not unreasonable to state that this is likely to be the result of the high levels of market volatility, the yawning chasms of uncertainty that peers back at anyone seeking certainty, a safe bet.

As an asset manager with a rules-based investment philosophy, we recognise the futility of prediction. Annie Duke’s book, Thinking in Bets, declares that there are two things that determine how our lives turn out: the quality of our decisions and luck.

Annie Duke, a former World Series of Poker champion turned business consultant, advocates that making better decisions starts with embracing uncertainty. For many people, it’s difficult to say “I’m not sure” in a world that values, even rewards, the appearance of certainty. We are discouraged from saying “I don’t know” or “I’m not sure.” We regard those expressions as vague, unhelpful and even evasive. But getting comfortable with “I’m not sure” is a vital step to being a better decision-maker. What makes a decision great is not that it has a great outcome. A great decision is the result of a rational process, and that process must include best efforts to accurately consider the current state of knowledge.

In February this year we published an article (Flight, Fight or Freeze) based on the letter received from an investor sharing how challenging it was to remain invested in our multi asset funds because they held no equities and the market was running like a Jack Russell through an open gate; as a result, investors were experiencing very high levels of discomfort (read FOMO).

As previously stated, we have no powers of prediction: in this article we declared: “…Answering your questions is difficult as we cannot predict the future and, in fact, avoid forecasting…equities could fall (high probability, high impact) or they could rise (low probability, high impact) or they could continue at current levels for some time (high probability, low impact). In all three instances we believe that cash will provide the best “risk-adjusted” return. …While we appreciate the frustration in not offering greater clarity on what we’ll be doing when, this is very much dependent on the behaviour of global markets and the business cycle.”

We are not immune or numb to the prevailing circumstance; we were sitting with our own version of discomfort at that stage. Uncertainty and fear in the market was resulting in outflows and discontent; investors who had previously subscribed to the fund philosophy elected to check out and take a different ride.

Annie Duke’s book also refers to the constant struggle to maintain a healthy perspective when chaos comes calling. Accordingly, the ‘Poker World’ has a variety of terms for the concept where “bad outcomes impact your emotions and can compromise your decision-making…emotionally charged, irrational decisions are likely to result in further bad outcomes that will then negatively impact your decision-making going forward and so it goes…” A vicious cycle…

‘Tilt’ is the term they use that implies that you are emotionally unhinged in your decision-making, i.e. blowing out of proportion an event because of an in-the-moment emotional reaction. By recognizing in advance the verbal and physiological signs that ticker watching is making us tilt, we can endeavour to develop a ‘trip switch’ routine to interrupt the flow of energy and create space to breathe. Aphorisms like “take a deep breath and count to ten” and “why don’t you sleep on it?” are a means to avoid decisions while on tilt.

We have always maintained that two factors most significantly destroy investor’s wealth: costs and emotions. Having a rules-based philosophy removes emotions and allows investors to sleep well at night.

We have no more certainty now than we did earlier this year; our multi asset funds remain invested in local and offshore cash and we remain alert to opportunites that will undoubtedly arise in due course. Our indicators, dependant on macro fundamentals, will signal an asset allocation shift and this can happen very quickly.  (Hopefully not as long as it took for Kate Bush’s ‘Running Up That Hill’ to get to Number 1 – that took 37 years.)

If ever there was a time to invest in our funds, this would be it; capital is protected but when the opportunity for capital growth presents itself, the funds will take full advantage. All too often investors are infatuated by the uncorrelated peaks and invest at the least appropriate time.

“All conditions and all circumstances in our lives are a result of a certain level of thinking. If we want to change the conditions and circumstances, we have to change the level of thinking that is responsible for it.” Albert Einstein