Did you know that the adult human body has 206 bones? Also, the only bone in the human body that is not connected to another bone is the hyoid, a V-shaped bone located at the base of the tongue.
The markets are one better. Everything is connected
Dr Copper is reputed to have a Ph.D in economics because of its ability to predict turning points in the global economy. The crude oil price also reflects expectations of global economic growth. So why is Dr Copper weak when the oil price is rising? As per the chart (Fig 1), the copper price has fallen by 9% so far this month, while that Brent crude price has risen by 7% i.e. a 16% difference in three trading weeks.
Could it be that they are answering different questions?
There are always idiosyncratic, localised reasons why the Rand hasn’t performed the same as its emerging market peers, for example, or why palladium hasn’t correlated closely enough with platinum. But how do two of the main barometers of global growth, which shouldn’t be affected by localised issues like OPEC freezes, give such different answers?
And that is the fund manager’s conundrum – to find the connection between the economic ‘bones’. The problem is, as clear as everything is after the fact, that nothing is ever clear at the time of transition. The fund manager, like most other decision-makers, therefore has to make decisions with incomplete information and in the face of significant uncertainty. They have to piece together the economic mosaic without a picture to work from and without all the pieces.
So how does an investor chose a fund manager when faced with the certainty that none of them has the whole picture from which to build their mosaic?
The trick is to ask the right question.
Ask the fund manager if he wants to be right or if he wants to make money. The former will confidently tell you what is going to happen. The latter will describe a robust investment process which (i) tilts the odds in your favour and (ii) has a firm grasp on capital preservation.
Decision-making in the face of uncertainty
