Facing the Unknown

By Jean-Jacques Duyvene Dewit, Prescient.

When we make decisions in life, the outcome normally provides direct feedback on the quality of the decision. For example, when choosing one apple over another because of a blemish turns out to be a good decision because the next customer found the worm ! However, in some domains– like the stock market – the feedback is trickier. In the short-term, the outcome is only a loose signal of decision quality. Engineers refer to such a system as having a low signal to noise ratio.

When the feedback is very noisy, it is more difficult to use the feedback for learning. One cannot necessarily extrapolate from a single case whether your decision was good or bad. You cannot tell on the next day whether your investment was a sound one. But humans have a tendency to create a strong connection between the result and the quality of the decision. When picking apples, this is a rational approach. When picking stocks, not so much. This is so because uncertainty plays a larger role in the market.

Where markets are concerned, a quantitative approach can be useful. By looking at many similar examples and learning from all of them, one can make a more general deduction. It looks, on average, like the market rewards companies with a low price to book ratio, more than it does companies with a high price to book ratio. In this way, your investment decisions stop being about being wrong or right on any particular day, but about calibrating among all the shades of grey.

A great decision can have a good or a bad outcome. The thing that makes a decision great is not its outcome, but whether it is the result of a good process.

Prescient has a very strong focus on process because, by looking at the information in an honest, less biased way, we are more open to calibrating our strategies. Our strategies improve the more objective we are, and in the long run, the most accurate strategies win.

Factor investing is in essence the application of broad investment ideas in a quantitative manner. Examples include value, momentum, size, quality and low volatility. The premise behind value investing is to choose between two comparable assets the one with the lower price. Momentum investing posits that stocks with positive price momentum will keep performing better than their peers. The size premium aims to reward investors for investing in smaller companies. Intuitively it also makes sense that high-quality stocks with more stable earnings, higher profit margins and stronger balance sheets outperform their low-quality peers over time. The low volatility factor aims to reward investors for investments that exhibit lower levels of stock price volatility over time.

Prescient’s processes prevent us from getting caught up in the day-to-day uncertainty of the market – we look through the noise for the signal. When others zig and zag, we stay in formation.

With inspiration drawn from Annie Duke’s book: Thinking in Bets



Latest


21 Sep 2020
Women are lagging in retirement savings and are debilitated by stress

In a recent study of their client base, Momentum Corporate revealed that almost half (41%) of the employees on the…

Women are lagging in retirement savings and are debilitated by stress

In a recent study of their client base, Momentum Corporate revealed that almost half (41%) of the employees on the FundsAtWork Umbrella Funds are women. With an almost 50/50 gender split across the client base, a one-size-fits-all approach to advice on employee benefits simply won’t cut it. This is according…

15 Sep 2020
Despite COVID-19, SA investors expect higher future returns

Even as COVID-19 halted the longest economic expansion on record and plunged the world into deep recession, South African investors…

Despite COVID-19, SA investors expect higher future returns

Even as COVID-19 halted the longest economic expansion on record and plunged the world into deep recession, South African investors expect to make an average annual total return of 12.67% – almost 2% higher than the global average predicted returns of 10.9%. This was revealed in the recently released Schroders’…

15 Sep 2020
Are cryptocurrencies here to stay?

The recent news that cryptocurrency giant, Digital Currency Group, has acquired cryptocurrency exchange company, Luno, has once again highlighted the…

Are cryptocurrencies here to stay?

The recent news that cryptocurrency giant, Digital Currency Group, has acquired cryptocurrency exchange company, Luno, has once again highlighted the rise of cryptocurrencies as a possible alternative to the current global financial system. According to Old Mutual Investment Group Director of Investments, Hywel George, Bitcoin, as well as a number…

10 Sep 2020
How too much choice is draining your brain

By: Paul Nixon, head of technical marketing and behavioural finance at Momentum Investments From the words of Francis Scott Key…

How too much choice is draining your brain

By: Paul Nixon, head of technical marketing and behavioural finance at Momentum Investments From the words of Francis Scott Key that dubbed America “The land of the free”, which stuck, to the unforgettable Mel Gibson monologue where an army of painted Scots were willing to trade their lives for the…


Top stories


10 Apr 2020
When the going gets tough, farmers are on familiar territory

South African farmers are old hands at adapting to uncertain and daunting circumstances, and our local agricultural industry has proved…

When the going gets tough, farmers are on familiar territory

South African farmers are old hands at adapting to uncertain and daunting circumstances, and our local agricultural industry has proved to be most enterprising in acclimatising to challenges as they arise.

13 Apr 2020
Investors should keep a reasonable investment allocation outside of SA

MoneyMarketing asked Roland Gräbe, the head of Tailored Fund Portfolios at Old Mutual Wealth, about offshore investments in the COVID-19…

Investors should keep a reasonable investment allocation outside of SA

MoneyMarketing asked Roland Gräbe, the head of Tailored Fund Portfolios at Old Mutual Wealth, about offshore investments in the COVID-19 environment and what form a global market recovery will take.

13 Apr 2020
SA’s Proposed Covid-19 Disaster Management Tax Relief

The National Treasury recently issued the draft Disaster Management Tax Relief Bill (Bill) for public comment by 15 April. The…

SA’s Proposed Covid-19 Disaster Management Tax Relief

The National Treasury recently issued the draft Disaster Management Tax Relief Bill (Bill) for public comment by 15 April. The draft Bill, together with its explanatory memorandum, provides clarity with regards the tax relief measures President Cyril Ramaphosa announced on 23 March.

11 Apr 2020
Finding investment opportunities among the many COVID-19 risks

With many countries around the world in lockdown as they try to contain the spread of the COVID-19 virus, the…

Finding investment opportunities among the many COVID-19 risks

With many countries around the world in lockdown as they try to contain the spread of the COVID-19 virus, the global economy is facing an unprecedented situation of balancing health against financial livelihoods.


Visit the official COVID-19 government website to stay informed: sacoronavirus.co.za