Scenarios as a tool for investment strategy development (part 1)

An investor with some (remaining) exposure to Greece, Spain or Italy would agree that we live in uncertain times. Predicting the future is a rather futile exercise, in response pension funds and investment managers are shifting towards the use of scenarios. Van Notten[1] wrote a very instructive chapter in an OECD Study on the use of scenarios. The word scenario has four different uses:

  • Sensitivity analysis, whether in cash flow management, risk assessment, or project management.
  • Contingency plan defining who is to do what during a particular event as used in military or civil emergency planning.
  • Contingency plan but applied to decision-making in corporate or public policy.
  • Scenarios as a more exploratory tool so that a scenario is less a strategy and more a coherently structured speculation, of interest for education.

On one point there is consensus: it is not a prediction or forecast. Pierre Wack[2], an executive at Royal Dutch who pioneered scenario planning, finds that “Forecasts are not always wrong; more often than not, they can be reasonably accurate. And that makes them so dangerous, They are usually constructed on the assumption that tomorrow’s world will be much like today’s […] forecasts will fail when they are needed most: in anticipating major shifts in the business environment that make whole strategies obsolete. […] The better approach, I believe, is to accept uncertainty, try to understand it, and make it part of our reasoning.”

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Trichet’s high conviction speech

Brilliant blog by Izabella Kaminski in ft.com/alphaville, finding strong similarities between Jean Claude Trichet’s swan song at the ECB defending the bank’s record, and Jack Nicholson as Colonel Nathan Jessup, delivering his speech in the courtroom to defend his decisions at Guantanomo Bay in “A Few Good Men. Another example where financial markets love decision makers and actors with high conviction. The speech also highlights the power of compelling story telling.
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10 Tips for Crisis Management

Pension funds experienced an uncomfortable déjà-vu when financial markets appeared to be heading towards a new abyss last week. Somehow, markets rebounded but experts fear that there might be worse to come. Business leaders and investors increasingly voice their concerns that politicians are mishandling crisis management. Are investors themselves able to effectively deal with financial crises? A number of pension funds seem to be better prepared in recent weeks, some of them seemed at a loss to act. 10 Tips for crisis management, some borrowed from other disciplines, some new. Continue reading

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Mauboussin – the short version

An MBA student fortunate enough to follow Michael Maboussin’s lectures jotted down the key messages in this blog by Frederica Zaldua. To give a flavour: “Investment outcomes combine skill and luck. Acknowledge the substantial role of luck. We’re all aware of it, but we still underestimate its significance.” In my view, Michael Mauboussin should be required reading for institutional investors, especially “More Than You Know: Finding Financial Wisdom in Unconventional Places”. Importance of design and implementation of the investment process over outcome is still a novel concept in the investment industry, and rarely taught in classrooms and post graduate investment analyis courses

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Top investment strategies – Being in tune with today’s investment needs

With the US donning a double-digit unemployment rate and the federal debt level spiraling out of control, more and more people are getting bored of their corporate cubicles. With jobs slashing down and wages going through massive cuts, people are finding it extremely difficult to make ends meet with their restrained finances. During such times, investment can make you breathe a sigh of relief as it gives you a worthy source of income that can be used to seek debt relief in the US. But, are you well aware of the investment strategies that can guarantee best returns? If you’re a novice in the field of investment, you can read on to know about some promising tips that you must consider before taking the plunge.

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