31 May 2021
Do you know what a paradox is? Well, I sort of do and sort of don’t! Apparently, there are four types of paradoxes but after reading about them I think I will stick to a basic understanding that a paradox is a situation or statement that is difficult to understand because it contains two opposite facts or characteristics. Got it? An example may help … “I can resist anything but temptation”.
The investment world is littered with paradox’s, not least the “Paradox of Thrift” – made famous by John Maynard Keynes in his controversial book “The General Theory of Employment, Interest and Money”. Note, this was published in 1936……
The paradox of thrift theory is that increased savings in the short term can reduce the ability to save in the long term. This is because increasing saving reduces spending in the economy. The immediate result being a smaller economy and therefore less money in the future to save. Keynes’ Theory is certainly facing its litmus test today – Governments have ditched austerity (the paradox of thrift) and are spending in an attempt to grow the economy so we can save more in the future. We will know whether it works over the next year or so!!
Investors of today also face another paradox. It is the Risk, Reward paradox. Why is this a paradox? Well, it is the dominance of risk over reward in what should be a balanced relationship. Risk is finance’s four-letter word. Reward can never be spoken of alone. Why is it Risk Management, not Reward Management? Why is the rule book on Risk, not Reward? The emphasis in the investment world is therefore always on the ‘What if We Can’t’ rather than the ‘What if We Can’. The glass is always half empty.
This focus on risk skews the investments we make and the long term returns we get. It pushes money into bonds with no yields and cryptocurrencies with no.., well, no nothing. Index investing is perhaps the epitome of the ‘What if We Can’t’ culture. Do not get us wrong, there needs to be parameters on ‘What if We Can’ investing but as long as Risk is pushed front and foremost the markets will continue to misallocate resources on a scale that has and will have consequences for us all.
MVAM is a ‘What if We Can’ investor. We invest in companies that can make a difference and management who focus on the Can rather than the Can’t. But for more to join us and help the world out we think a name change is needed. Name changing is important in changing perspectives. Apparently, UFOs are now being called UAP’s (Unidentified Aerial Phenomenon) to stop the subject being laughed at. Perhaps we can change the terms ‘Risk’ and ‘Reward’ to ‘What if We Can?’ and ‘What if We Can’t’. It may lead to a more sensible balanced investing profession. Now What if We Can do that….