Hard choices

It never has been easy to know how to invest successfully, but recently it has become much more difficult.

Not only are there an inordinate number of political cross-currents that have to be negotiated, but nowadays corruption in the investment sector has become rampant and tends to obscure the entire picture.

Recently, Citigroup in the United States agreed to pay a $2-billion settlement for dealing in mortgage-backed securities. Prior to that JP Morgan Chase was fined just under US $34 billion and Barclays US $470 million. The latter acknowledged manipulating the price of gold. These were merely the tip of an iceberg, as smaller institutions also have been culpable of wrongdoing.

Increasingly, clients of investment firms have been injured as orders have been put in from clients after processing personal trades. A banking firm told its sales staff to go out and sell an issue even though it was acknowledged that it was no good.

The investment industry is filled with examples of missteps. Long-Term Capital Management, a fund supposedly run by brilliant individuals who were so very well versed in the ways of the investment sector, used tricks such as selling short bonds issued by nearly bankrupt institutions. However, even though the managers were experienced and very smart, that fund collapsed and the banking industry had to bail out many with billion of dollars.

Investors have been told to buy low and sell high. Yet when everyone is panicked it is difficult to know when “low” is present as markets often go to extremes.

Another tactic suggested is to rebalance one’s portfolio as some investments seem out of line. History shows that rebalancing provides an annual return of 3.64 per cent compared to a do-nothing stance of 5.64%. How about buying Japanese equities after they crashed? Yet, they have remained flat for more than a decade!

Others urge purchasing equities when price-earning rations were low. Following that Elroy Dimson, Paul Marsh and Mike Staunto of the London Business School reported the results were inferior to buying and holding equities. Similarly buying commodities has not been very profitable as most have fallen dramatically in recent years.

Hence what should investors do? Investors, not speculators, should purchase equities to hold for a prolonged period – say many years. Shares in companies that provide everyday necessities, such as food or utilities, over many years will be the most satisfactory approach.

That requires patience and a willingness to accept modest returns, but nothing spectacular.


Bruce Whitestone