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Why Access to Global Economic and Investment Opportunities is Never Equal for Everyone

Many clients rely on good-old investment philosophy such as Value-Investing or Fundamental Analysis.  Some clients who are keen on price movements, charting and patterns, may employ the use of technical analysis.

For wealth & investment professionals, such as traditional Fund Managers and Chief Investment Officers, they rely heavily on Modern Portfolio Theory.

Given the popularity and evidential-effectiveness of Value-Investing, Fundamental analysis, and Modern Portfolio Theory, shouldn’t clients, wealth & investment professionals be doing better or at least matching the benchmark easily?



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Or is the Efficient Market Hypothesis proving right that one can’t beat the market?  Or do Hedge Fund Managers know something that everyone else doesn’t?

Or perhaps, access to global economic and investment opportunities is not equal for everyone?

Read More:

  • What is Value-Investing?
  • What is Fundamental Analysis?
  • What is Efficient Market Hypothesis?
  • What is Modern Portfolio Theory?

 

No. 1 The Efficient Market Hypothesis in Question

Currency Movements
Currency Movements

The Efficient Market Hypothesis states that it is not possible to beat the market because all relevant news & information are already known, and that the price is already reflected in the market.

As beauty lies in the eyes of beholders, everyone’s perception of a fair valuation or price of an investment is different.  This means ideally if all rational and irrationally investors participate in the price discovery, with the ensuing market reflecting the price, the price should vary widely, instead of around a single price (+/-).

Why is it Not Equal for Everyone: Ignorance or Simply Lazy – The theory didn’t state if all investors and professionals are avid readers of the relevant news.  The theory also ignore if everyone have access to the tools, having the required knowledge to use the tools correctly, and the accessibility to the investments.  Eg, we may be sleeping when something happens.

 

No. 2 The Fallacy of Great Investment Opportunities to Everyone

Connections
Connections

Should great investment opportunities be shared with the laziest person or the richest person? Or should it be made publicly available so that everyone has the opportunity to review the investment opportunity?

Why is it Not Equal for Everyone: The people (business owners / consultants / financial advisors / investment bankers) who put up the investment proposals would probably go to the investors willing to pay the most money with the least information & disclosure required – Not to the ones that ask questions such as what is the forward P/E, FCV, NPV and NAV.  (We deliberately omit the explanation of the abbreviations to be on the side of 95% or more of population / investors who have no idea what these means).

Or perhaps they decided to market to small investors instead?  It is all subject to the strategy of the business owners and the investment brokers.

No. 3 The Perspective of Rate of Return

Stock Market Quotes
Stock Market Quotes
To someone in United States, Western Europe, Hong Kong or Singapore, they would be fairly happy with a return of 5% (if nominal interest rate is 3% and inflation is 2%).
While in Indonesia, China & India, their central bank rates are at 6.75%*, 6.5%*, 4.35%*.  This means their domestic yield on bonds and deposits could be ranging from 5% to 10%.
* Central Bank Rates on 1st May 2016
Would a 5% return in global equities or diversified portfolio justify their risk-taking or investment returns in different countries?
Why is it Not Equal for Everyone: An investor in a developed country is used to having information and accessing risks and returns.  An investor in an emerging country is prepared to take on excessive risks since they have less to lose.  There may also be restricted access to global investment opportunities such as foreigners’ restrictions, availability of stock / bonds exchange, price & volume efficiency, access to brokers, capital controls on money flow and exchange rates fluctuation.

No. 4 Dealing with Money Flow 

Foreign Exchange
Foreign Exchange
Most investors, wealth & investment professionals place significant emphasis on reviewing capital controls and exchange rate fluctuations.  No one would place $100 Million portfolio in a country that may suddenly cease all outflow of capital or the currency depreciating or appreciating +/- 30% frequently.
Why is it Not Equal for Everyone: Most will shy away from such investment opportunities due to money flow problems.  Since the risk is high, the returns potentially could be high too.  To structure the investments and to build risk-mechanisms, the professionals uses synthetic structures such as Synthetic Exchange-Traded-Funds and derivatives such as forwards, futures and swaps.  More sophisticated transactions such as asset structuring can also be done.  Such transactions are common in Investment Banking, Private Banking and Private Equity.  In other words, if you are a client of these financial services, you may have access to such opportunities.  It also means if the deal is structured badly, you could lose some money too.

No. 5 Transactional & Executional Expertise

Banker in Distress
Banker in Distress
Once a great idea is spotted, we look for financial instruments to access and execute the opportunities.  With a complex global economy and financial system, it is not an easy job to find the ideal financial institution to transact and execute the investment.
Why is it Not Equal for Everyone: Most people just can’t afford to pay premium prices for quality transactions.  The professionals who have the expertise will simply serve clients who have larger and larger assets.  But it doesn’t means paying for the best professionals get things done all the time –
Examples that doesn’t look too good:

No. 6 Safety in numbers.  The Herd Mentality

Fund Management
Fund Management
Everyone loves the the feeling of warm and comfort everyday.  And when you are wrong, at least you are not the only one.  But when you are right, neither are you the only one.  There are likely thousands if not millions.
Do you know your numbers:
  • The World’s Population
  • The Number of Investors in Apple Inc
  • The Number Investors in Alibaba Inc
  • The Number Banks in United States
  • The Number of Banks in the World
  • The Number of CFA Holders
Why is it Not Equal for Everyone: While most investors would be happy with 5% or 10% returns, there are a small group of investors who consistently capture 25%, 50% and 100%.  Why would there be such a vast difference in returns?
The two groups of investors clearly have a different opinion of risks and returns.  If more investors are aware of the methodology to generate 25%, 50% and 100% returns, would the returns diminish then?  Or maybe one day, they might lose it all.  For most investors, generating reasonable or more returns and losing less are key priorities.  And because most investors continue to think these way, investment opportunities rarely come their way.

No. 7 Does Good Investment Opportunities Exists?

Portfolio Allocation
Portfolio Allocation
Or perhaps there are no such things as good investment opportunities.  You can discover a goldmine just right under the land you are standing on.  But if you don’t have the knowledge and skills to mine the gold, you can’t make money out of it in your lifetime.  If you don’t have the skills to classify the gold, your gold piece might end up on a computer chip and not on a royal family jewels’ collection.
Why is it Not Equal for Everyone:  A good and bad investment opportunity is subjective.  Whenever an investment go sour, most call it a terrible investment.  More blame it on a lack of study and research.  But somewhere in the world, a few wealth & investment professionals make money out of these “terrible investments.”  They may call that distressed assets.  Some facilitates the liquidation such as in a bankruptcy auction.
These are 7 reasons why economic & investment opportunities are never equal.
And if access to global economic and investment opportunities are equal, wouldn’t everyone be taking the same risks and same returns?  Would that be communism or “equal-capitalism”?
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