Industry veteran shares 30 years of investment insights

This year, our company is turning 30 and it got me thinking about how far the world of investing has come since then – and where it’s headed in the next three decades.

Imagine it’s 1992. South Africa is on the cusp of democracy, the Cold War ends, the FBI starts circling around the Wolf of Wall Street, and the public internet takes off with the first public browser and the coining of the phrase “surfing the web”.

Now, three decades later, South Africa is facing new challenges, the world is confronted with hyperinflation, the Russia-Ukraine war is sending energy and financial markets into a tailspin, and data is the most valuable asset in the fintech-driven, consumer-focused online world. A lot has happened in 30 years and economies and markets have evolved a great deal.

Thinking back over the past 30 years – and even back to 1988 when I started my career as a young bond trader – I have learnt plenty of important professional and personal lessons, which is why I believe focusing on the long-term is so important.

Above all, I learnt that one thing remains constant: the fundamentals of investing will always matter.

Markets might be traded by algorithms and machines now, and patterns and behaviours might change in the short-term, but in the long run economic fundamentals still drive the returns of all asset classes.

My most valuable investment insights over the years

When it comes to the art of investing, I’ve learnt to use short-term noise, rather than run away from it, to create long-term opportunities. The crux of this art is preparedness: you must know what you want, at what level, even before it’s there. Then you wait for the moment.

This strategy sounds simple, but it’s very difficult to adhere to. That’s because of what I term “short-term-ism”. People get distracted by short-term issues and in so doing lose focus of their well-defined long-term strategies.

Some of the most valuable lessons in my career on this very concept came from these events:

• 1995 market jitters: As a JSE trader I learnt that news focused on a single event can trigger irrational behaviour. One day in 1995, I had a positive and quite a big position in the financial markets. Then a news article came in over the wires that there was an ambulance parked outside President Mandela’s house, Tuynhuys. The markets panicked and sold off sharply in a short time period. I experienced a massive loss, until an hour later when the news came out that he was fine, and the markets rallied back.
• 1997 Asian crisis: South Africa was suddenly affected as a fellow emerging market. By this point in my career, I was working for an investment bank, dealing in government bonds. A call from my boss in London about the crisis changed my life, because it taught me the value of the global context, risk and contagion. After this, acronyms like BRICS, CIVETS and MINTs became part of the market’s lexicon.
• 1998 Russian financial crisis: It was my first experience of a country defaulting on its sovereign debt. I’d been taught that government bonds were risk-free, but thankfully we had been sensitised and prepared by the Asian crisis. While we saw a 50% drawdown in terms of the value of bonds in a matter of days, I had a spectacular performance over that period. At the same time, the South African markets broke down as some global players withdrew and suddenly only the local banks would provide liquidity. Ever since then, I’ve had an enormous focus on liquidity and trusted counterparties.
• 2007 Sub-Prime crisis: In 2007 phrases like “sub-prime mortgages” and “securitisation beneficiation” opened the door to another global recession. The first casualty was Iceland which defaulted and fell over. Next Lehman Brothers became insolvent and the whole banking system came to a standstill. Again, my views on trusted counterparts came into play. At the time I was an investment manager at a large South African pension fund and was able to apply the lessons learnt during my career to steer the ship past the icebergs. These lessons came in handy again in 2008, when Greece toppled over amidst the European debt crisis. It always fascinates me how the same themes reappear time and time again. 

All the lessons I learnt from these experiences led me to believe that the key to long-term investing is risk management, rooted in the fundamentals of long-term investing.

First, you must define what you consider risk to be and then you must reduce it to optimise the expected return per unit of risk.

In the long term, with similar portfolios, the one with the lowest risk-to-return ratio wins.

When it comes to long-term investment it’s not the investor with the highest return that wins, but the one that is still in the game. Multi-generational portfolios must never ever face existential risks.

My other key lessons are: your word is your bond, success in the markets is 99% graft and 1% talent, it’s important to identify your niche skill or speciality, embrace lifelong learning as you never have it all figured out, and live a balanced life – your health, family, community and environment are just as important as your career.

How to create wealth over the next 30 years

The past is important, mainly because it helps us navigate the future. So, based on my experience in the wealth and asset management industries, I believe the financial services sector will experience new kinds of pressure to meet consumer needs as it evolves and digitises.

I believe these are the top trends that will define the future of wealth management:

• Personalisation: Clients demand more flexibility and more focus on their own unique requirements. Client-centric wealth managers will embrace this trend.
• Technology and omni-channel access: Clients want a seamless delivery of both personal and digital services. They always want mobile access to both people and systems. Tech-enabled decision-support will play a major role for both the client and the asset manager.
• Growth of access to real assets: The private sector will have to step into the funding of the future as infrastructure developments on very long-term assets can’t be funded by governments via debt anymore. Direct access to these long-term real assets will provide attractive opportunities for private clients.
• Tokenisation: New digital technologies offer more efficient ways of issuing, transferring, and storing assets in an electronic form. This technological change of proof of ownership will also materially affect and change the intermediaries involved, along with their respective roles and value-adds.
• Regulation: Technology has enabled better surveillance and so the scope of regulation is growing exponentially. In fact, regulatory technology, RegTech, is expected to boom in the next decade and real-time synchronicity between regulators and the regulated will become mainstream all over the world in the next decade or two.  

There is no crystal ball for investment managers, but there are fundamental ways to ensure their portfolios (a) withstand turbulence and (b) maximise opportunities.

Our approach is based on the following four pillars which will continue to guide our decisions into the future:

1. The future is uncertain and will often surprise us; 
2. Diversification across a range of asset classes improves risk-return;  
3. Investing must be valuation-sensitive, and decisions based on under- and over-valuation of asset classes;  
4. Asset allocation drives performance.  

George Herman is the chief investment officer of Citadel.