Investment Management

Seeking investment management services can have many purposes, but a precursor to seeking such service is first understanding one’s reasons for why you want to invest in stocks; and how long a commitment you are willing to make. No matter who you seek in managing your investments, you will be waiting for quite a long time for the results produced by the investment manager to come into fruition. Such is the nature of investing capital in the stock market.

No matter what “buzzwords” and salesmanship/promotion that we are presented with. There are certain true and tested investment principles that have worked for a long time in the financial markets. It is the job of an investment manager to not just to advertise that they know those principles, when providing their investment service. But to be able apply those principles; and demonstrate that they actually know what they mean within the world of investment management and financial analysis.  

Usually, an average investment management service will provide their client with cautionary note when they seek higher returns for their investments. The reason most investment firms in this business will give against a performance-fee only based funds, like Koko Asset Management, is that it involves producing higher returns through investments that are “riskier” or more “speculative”. Now obviously, there is nothing wrong with an investment advisor providing cautionary advice to their client about such risks. In fact, it is the job a good financial advisor  — as someone who has a duty to warn their clients­  —  to urge caution where there are material risks associated with their client’s investments and to safeguard their assets.

However, in order to probe further, one would actually need to know what is meant by the use of the word “riskier” or “speculative”. In the context of their use, such words only have the appearance of being objective, but are in fact quite subjective; with really no generally understood definition of what “riskier” or “speculative” exactly mean. Now this does not give way to gambling with money; or investing in businesses that are judged patently unsafe through careful investment analysis. Nor is it a call to throw caution to the wind by failing to apply common-sense investment principles. Nor is it being uninformed or oblivious to the important downside risks associated with the contemplated investment. Neither is the goal to encourage dangerous behaviour like the use of margin, such leveraging can magnify losses.

What the above does convey however, is that the measures that led one to believe a stock is “risky” or “speculative” are inherently imprecise, and open to a broad spectrum of interpretation. Ultimately, any decision made using the client’s capital will be driven by the particular facts of the specific investment under consideration and not by such incomplete measures, which are at its root as commonly used, self-serving generalizations.  

Another important consideration regarding investment services is fees, and their impact on returns and performance. In the money management industry, there is still by and large, no good explanation for the mediocrity of the results many investment managers produce for their client’s overtime. As evidenced by the fact that vast majority of investment services have no credible strategy or even interest in beating an S&P 500 index fund. If the investment fund has no past evidence of returns doing any better than a passive index fund; what meaningful value could they possibly add to the money you invest with them, in the future? Given such realities, it would in fact, be better off buying an S&P 500 index fund and forgetting about it for 10 years.

Happily, it has been the experience of many good investment managers, that producing “higher returns” has greatly more to do with being able to apply a set of reliable and proven investment principles. Than some formulaic or rigid notions, that have no regard whatsoever for the context under which the investment decision is made. An investor’s ability to analyze businesses and investment facts, is of far more relevance in producing higher returns, than simply the level of perceived risk involved with the investment decision.

Ultimately no matter who the investment manager, risk will not be fully eliminated. In fact, the very same investment funds that purport to make less “risky” or less “speculative” investments; may well lose a significant portion of your money during a stressed market environment; with some of those funds unable to recoup those losses in the future. 

Even though risk cannot be fully eliminated and not every crisis or adverse development in the market can always be anticipated with 100% precision. It is nonetheless true that for all practical purposes, vast majority of the risks effecting your investments can be avoided by a cautionary investment manager. So long as the investment manager stays within the universe of businesses or stocks they understand. It is perfectly possible for investment risks to be intelligently controlled and measurably reduced, without compromising satisfactory or, at times, even exceptional returns.