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  • Christian Armbruester

Rules of Engagement

Why the trend is our friend, but we must still cut our losses.

There are views, there is thematic investing and there are so called “super-trends”. In the words of Frankie Goes To Hollywood: what is it good for? To make us money of course, but not all investments are created equal. In other words, we still need to follow the rules of engagement when it comes to investing and it all starts with how much money we are willing to lose. For some it is 5%, for others it is 30%, but there has to be a number at which point we admit that we were wrong.

Take Gold. For one, there is the mostly inverse relationship to the US Dollar and strength in one, tends to mean weakness in the other. People also buy the precious metal as an inflation hedge and of course Gold can also act as a safe haven in times of market duress. The point is, the price of Gold is driven by the relative strength of all of these things and given that it is just as difficult to take a view on inflation, it makes predicting the direction of the next move in Gold a rather challenging proposition. So, best to put a tight stop loss on any investment we make.

Now, consider alternative energy. Clearly, the world is going to wean itself off fossil fuels for no other reason than there is a finite amount of oil and coal in the ground. Whilst we are nowhere near kicking our habit of destroying the planet, the rise in solar, wind or other renewable energy has been significant for several decades. It is estimated that by 2025 more than one third of the world’s energy will be supplied by renewables. As such, investing in companies that are developing or supplying alternative energy seems a decent investment theme. One which probably deserves a larger stop loss should we get our timing wrong, but it is unlikely that this trend is going to change, therefore we can always get back in.

Then there are the super-trends, and they are defined by things that cannot be undone. As an example, we can look at global demographics. The population in most developed nations is aging. There is a high correlation between the level of wealth and longevity, but moreover, with the advances in medicine people tend to live longer. The average lifespan in the 1960s was just under 70, whereas today it is north of 80. Investing in specialised healthcare and luxury entertainment that caters to the needs of wealthy retirees hence seems a very good bet. One that may deserve a wider margin when it comes to our risk management parameters.

What could possibly go wrong with any investment we make? The future, and very few people would have predicted the world to shut down in 2020. Gold rose and fell sharply, alternative energy did the opposite, and even our super trend came under duress as the virus ravaged amongst the elderly. Alas, our stop losses, and always remember there is no such thing as a risk free investment, no matter how strong our view, the theme or the underlying trend.


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