Volatile stock and bond markets are not going away anytime soon, and investment strategies focused on discipline, market-tested algorithms, and the patience to withstand near-term turbulence will continue to deliver better results. As US stocks have dropped about 25% and US long-term treasuries dropped nearly 30%, specific strategies that combine futures, derivatives, and other securities along with market-neutral equity trading have produced superior returns. This impressive overall performance can be expected to profit from market movements and even market shocks that, while specifically unpredictable, will be inevitable from now on. In the face of dismal predictability and lack of confidence, it is discipline, time-tested algorithms, and a multi-strategy perspective toward broad market sectors that have outperformed and will continue to deliver superior risk-adjusted returns and better overall performance.
This book explores the next decade’s more frequent and intense economic, geopolitical, fiscal, and market volatility, technological innovation, disruption, and hype.
Long-term opportunity exists, and this book uses a 10-year horizon as a surrogate for a long-term perspective. Some of the world’s most important industries are being disrupted, especially finance via digital assets and Blockchain-based businesses, life sciences via gene editing, DNA sequencing, and CRISPR, and communications via advanced wireless data networks, software technologies including artificial intelligence, and new interactive platforms such as the Metaverse.
The onslaught of market-making bad news seems almost a daily event. A gloomy picture of slowing economic growth, elevated inflation, and confusing fiscal and monetary policy has added a lethal mixture to the market’s performance. Fiscal stimulus is sidelined, and monetary policy is constricting economic growth and entrepreneurial innovation. It makes for a gloomy outlook and an even more depressing long-term perspective. The next 10 years look more like a lost decade. High-growth company valuations have been significantly discounted, and over time as discount rates drop, their valuations are likely to increase substantially. Higher-yielding fixed income securities will be a standout performer as interest rates are reduced, the higher-yielding BDCs, REITs, leveraged loan securities, and high cash flow instruments, along with high-dividend equities, will prove extremely attractive and are currently available at bargain prices. Providers of value and users of value will be the winners for the next decade. Those generating real cash flow and disruptive innovation will define the next decade.
Predictions usually end up being nonsense. We simply draw a trajectory from what we know today. But innovation is a discontinuity. Things are unpredictable because innovation does not come from consensus thinking. It comes from small groups and individuals with a spark of entrepreneurship, intelligence, and vision.
One of the fundamental tenets of predicting technology is that most forecasters get things spectacularly wrong.
The market is consensus thinking. Performing above average means being different. Simply being different doesn’t define success. Success means understanding what it takes to not only think differently but understand when consensus thinking is wrong and executing and implementing those choices effectively. Doing better (generating superior returns with less overall risk) is difficult. Understanding “what’s really going on” is not a simple formula. It requires different, deeper, and better thinking. Depart from the investment crowd, focus on the factors that are necessary and, in combination, sufficient to make a difference, sustain performance and manage risk. It’s not easy or obvious, but it is superior.
The illusion that one can either predict or get ahead of cycles, or predict when they will end is why most investors underperform the market. Markets are driven by human emotion, and it is human emotion combined with the supply and demand dynamic that determines price. Therefore, pricing is independent of anyone’s perspective about “intrinsic value.” Markets are based on price, price is based on supply and demand, and that dynamic is subject to abrupt changes based on the whims of small numbers, and sometimes exceptionally large numbers, of investors. Human behavior controls the markets. Optimism, pessimism, psychology, fear, conviction, and resignation all play a role in adding to volatility and uncertainty. Frequent and intense volatility is here to stay. Market movements really can’t be predicted unless they are at extremes when prices are at absurd highs or lows. But, picking the high or the low is a fool’s errand. Understanding and profiting from volatility, managing risk, and believing in a sustainable investment model is still the best strategy.
Transformation, or euphemistically, “disruption,” creates great opportunities to capture newly created wealth. But, as industries are transforming and strategic disruption is occurring, quite a lot of absurdity and certainly enough terror are associated with some of these extraordinary opportunities to require much greater analysis and understanding. There are extraordinary risks associated with anything disruptive and transformational. The first disruptor isn’t always the one who creates the most value or is even a sustainable competitive entity. Innovation does not mean competitive sustainability. Digital platforms, ranging from the internet to digital assets and cryptocurrency are transforming industries globally. But, along with that comes a lot of hyperbole and typically that is followed by very little substance. Great companies use technological disruption, innovation, and transformation to establish themselves and thrive. But they rarely last. Every company, even the most valuable companies such as Apple, Apple, Amazon, Facebook, Netflix, etc. must dynamically transform to stay competitive and valuable. Transformations are certain. New entities will become very valuable, legacy companies will diminish, and a handful will transform and thrive. Transformation and sustainability create and capture great wealth, but are far more challenging to identify, and even more challenging to sustain.
The show analyzes emerging economic and social developments, identifying the most critical issues impacting investment success. It looks at globally disruptive changes and strategies to profit from these new market forces. Innovation, advanced technologies, geopolitics, and new interrelated factors are essential components of future investment success. Investment success combines predicting the future, the confidence to make bold choices, and the fortitude to stay with those choices. Today’s volatile and uncertain world requires new knowledge and perspective and assembling relevant facts from many diverse sources to make better decisions and achieve superior returns. Some of the world’s most important industries are being profoundly impacted by new technological innovations and platforms, such as artificial intelligence, digital assets, blockchain-based businesses, gene editing, and DNA sequencing, enabling unprecedented disruption to business and economic models. Stable predictability is increasingly anachronistic. Every company or industry will either be a disrupter or disrupted. The leading growth companies of today stand an excellent chance to be memories tomorrow.
The world may appear to be a rational, deductive place if you are a scientist. But not if you are an investor attempting to understand how markets work. Financial markets are human creations, and humans are irrational. Economics, a truly dismal social science, is an attempt to look backward and create explanatory algorithms about what happened and why. They may have some success with this. But as predictive models, they are mostly useless. More often, they destroy value versus conveying any understanding about economic and business functions, and therefore, give not only useless but awful and typically value-destroying predictions. Participating in the markets requires a broader, more methodical and disciplined approach. Since irrationality pervades most activity, markets move dramatically with uncertainty, and investors react with dramatic moves based on even more uncertainty and lack a reasonable level of understanding and longer-term perspective about what is going on. The world now is more dynamic, volatile, uncertain, and unpredictable. Irrationality drives most market decisions and rising above the noise to be more thoughtful, think deeply and slowly to understand what’s going on, and identify the handful of factors (typically very few) that make all the difference to investment success is the true challenge we face today. That challenge takes work and thoughtful strategies in our irrational world. That world will remain fundamentally irrational from now on, and thoughtful strategies are the only way to succeed in this irrational environment.
Super lofty ideas get attention and publicity, but they are not real. Narrow, specific applications are where true foundational value is created. The financial revolution will certainly not be based on a process where someone buys coins or tokens and simply waits for them to increase in value. On top of that, despite the belief that there will be frictionless peer-to-peer transactions, purchasing any cryptocurrency requires a crypto exchange like Coinbase or FTX that charge high trading fees and have questionable security. Blockchain is an evolution for businesses, it is not a disruption or a new infrastructure. It will improve user experiences, regulatory clarity, and interoperability. Crypto proved that digital transfers and settlements were possible, it is the blockchain platform that enables this efficiently and securely. It may be boring and we’re not going to have any stadiums or arenas named after a technology platform, but real change will be driven by a blockchain. The rest is a noisy sideshow.