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Chris Gilchrist: What is your investment philosophy?

Chris Gilchrist MM blog

Investment selection should not be about the nuts and bolts of funds or managers. It has to start with the adviser firm’s clearly stated beliefs about investment.

Some use the grander words ‘investment philosophy’, but as a philosophy graduate I worry that this is a contradiction in terms. 

Do you believe the markets are efficient? In what sense – so efficient that there are no £20 notes on the street, or so efficient there are no 10p coins? Do you believe asset allocation is the primary investment decision and if so why, and how do you decide what allocation is suitable for clients? Do you think the apparatus of Modern Portfolio Theory provides a suitable framework for assessing risk and how do you use it? The answers will point towards appropriate methodology.

The English are the world’s worst pragmatists, distrustful of theory to the point where they prefer to bumble rather than think (the Scots, Irish and Welsh are not guilty – they’ve come to terms with the bossy and arrogant Normans, unlike the English, who still carry that Anglo-Saxon chip on their shoulder).

But anyone who has not attempted to articulate their investment views will not have a sound investment proposition. They’ll just go on bumbling.

Or they’ll grab at the latest black box that appears to offer a ‘scientific’ investment solution. There is no such thing. The false precision of algebraic and probabilistic methods fundamentally contradicts how and why markets work.

Investment is about forward-looking judgments, not backward-looking statistics, and a knowledge of history is far more valuable to an investment adviser than a knowledge of statistics.

The current obsession with ‘robust investment processes’ partly reflects the fact that too many advisers recommended too much dodgy stuff in the past. But we need to keep things in perspective.

Most financial advisers are financial planners first and foremost and their investment process should sit within a financial planning process.

Financial planning starts with goals and aspirations and engages the client in a way of thinking about their life that may well be novel and ought to be liberating and anxiety-reducing.

Investment methodology has to make sense within this framework and ideally should be capable of simple explanation.

If you use asset allocation methods (including any of the black boxes), you have signed up to the proposition that spreading your money around reduces risk.

This is certain but it is always debatable whether it will increase returns. Often, asset allocation doesn’t increase returns – so why do so many advisers spend so much time justifying methods of wringing out extra returns rather than emphasising the protection of capital?

Presumably they think greed is a more powerful motivator than fear. But my view remains that if you take the regulatory requirement to consider capacity for loss seriously, this ought to form the bedrock of your investment process.

Loss control, above all, is forward looking and cannot assume that the future will be like the past. If you are a discretionary fund manager, then you may believe you are smart and agile enough to avoid Bond Doomsday and can carry on bicycling along the edge of the cliff with holdings of low-yielding bonds.

If you operate on an advisory mandate, doing this exposes your clients to risks for which they earn derisory returns and your business to suitability risks it doesn’t need.

Chris Gilchrist is director of FiveWays Financial Planning, edits the IRS Report newsletter and is the author of the Taxbriefs Guide, The Process of Financial Planning

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. “Investment is about forward-looking judgments, not backward-looking statistics, and a knowledge of history is far more valuable to an investment adviser than a knowledge of statistics.”

    Only if you think history is a continuous loop which is destined to repeat itself ad infinitum.

    This sounds like a philosophy student writing but my perception of philosophy as a basis for practical application is a bit like Tom Stoppard’s in his play Jumpers. A philosophy professor proves by logical philosophy that an arrow fired at a target never actually reaches it; as a result of which he resolves that St Sebastian died of fright.

    We have been told that the economic crisis we are (slowly) recovering from is unprecedented. Where to now Mr History Man?

  2. I agree with Chris, history certainly provides perspective. I’m sure he doesn’t suggest that it should be slavishly followed. We are indeed in strange waters. I find my economics textbooks of little value now.

    As to investment philosophy, well I guess for me it is:

    1. Don’t lose money. (Or at least try very hard not to).
    2. Provided it’s legal, nothing is out of bounds. Trying to make money is hard enough without tying an arm behind your back.
    3. Where you can; minimise tax – as long as it doesn’t impinge on the investment sense. (Yes I’m a supporter of Amazon, Google and Starbucks)
    4. Remember funds, asset allocation and all the smart hoopla shouldn’t disguise the fact that we invest in companies. We have to trust the managers as at any given time we don’t know exactly what’s in the tin, but a good look round previous reports should give you an idea of where the money is. Do you know the firms? Do you think that these would be ones in which you would put your own money?
    5. Lastly it is wise to advise on those products, funds and schemes in which you have or have had your own money. It is also sensible to advise within your own socio economic group. I always found it odd that the impecunious were advising the wealthy.

    Not exactly Descartes or Munchhausen, but I guess it’s philosophy of a sort.

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