Investment requires overcoming the capacity of our human minds in the face of complexity, uncertainty and limited, unclear information to, nevertheless, execute purposeful action that will bring benefits in an unknowable future.
It is hardly surprising, then, that investment people often need help:
Investment Policy: often estimated as the most important contributor to investment returns, investment policy depends on high-level comparisons of very different asset types. Even defining the types usefully can be troublesome. A rigorous, logical and experienced approach to the task can make subsequent implementation much more successful and rewarding.
Investment management: from the perspective of both investment managers and investors hiring them, investment has to be a well-defined repeatable process. The challenge of generating a product that is what it says, and does not promise what cannot be expected to be delivered is a key step for providers.The assessment of how well this has been achieved is just as important for investors.
Numbers: too often, numbers and statistical methods are used either lazily or to mislead. How often have we seen an analyst, or a policy advisor, present historic numbers, apply a short piece of statistical analysis, or a standard valuation metric, and suddenly leap from that to an investment conclusion? Somewhere in the middle, it is clear that a myriad of alternative interpretations have been lost but we are not invited to pursue them. Long term investors, top managers in investment companies, and distributors of investment products can benefit from someone who will apply numbers rigorously or not at all. If statistical models are involved, their assumptions will be clearly stated and understood so that only valid conclusions will result. And simple track records will be broken down and attributed to the various factors that generated them.
Risk: from business risk, to regulatory risk, to market and investment risk, to credit risk, to operational risk, and reputation risk, no-one who has taken the challenge of investment seriously has not at some stage been daunted by the tasks of compliance, risk assessment, quantification and protection involved. Part of the task involves having appropriate expertise to hand and putting well thought out investment processes in place. When it comes to planning and managing portfolios, risk is an intrinsic part of the process, but great care is needed to ensure that the means used to measure it are appropriate.
Cost of investing: when costs are “assumed away” it is very difficult to get them all back into the picture. Some investment costs are potentially very significant and need to be fully understood and factored in to decisions at all levels, not to mention tightly controlled on an ongoing basis. I have too often seen this overlooked.
Specialisation and the cost of investment management: whether you are an investment manager, an institutional investment officer or trustee, a corporate or a credit union, there are many specialist tasks that are required of your staff. You will not want to add unnecessarily to the numbers you employ, so it often makes sense to parcel out tasks to an independent assistant.