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Tom Becket: 10 lessons from 10 years

Psigma Investment Management's CIO gets nostaligic as he celebrates 10 years at the firm.   

Expect the unexpected

Thomas Becket recently celebrated his 10 year anniversary at Psgima.

In this piece he highlights the 10 lessons he's learnt over this period, mappin them against some of the major events which marked this decade.

Becket says: 'It comes with some surprise that I can state that I have just made it to ten years at Psigma. It’s certainly been “exciting”; bull markets, bear markets, the illusion of the “Age of Moderation”, the “GFC”, the pathetic recovery, the European crisis (parts 1, 2, 3 and now 4), mega acquisitions, spectacular bankruptcies, the commodity super-cycle, many wars, natural disasters, wayward central bankers and useless politicians.

'So, to mark my first decade I thought I would take a moment to reflect and share some of the key lessons I’ve learnt over the past ten years. Above all it has always paid to expect the unexpected.

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2005: Angela Merkel becomes German Chancellor

Lesson 1: Never forget how lucky we are to work in this industry

I was at a distinct disadvantage when I left university, as I had no idea about what I wanted to do. Having spent years in Dublin studying Classics (or “Lord of the Rings” as our head of operations helpfully suggested) I had not a clue about my next step in life.

One of the reasons that I am now so willing when it comes to having work experience candidates sit with our team is that I was there a decade ago. Interviews with investment banks showed me up as clueless, given my sole financial experience had been to watch the film Wall Street (which actually proved an unsuitable grounding for life in wealth management).

It was during an interview at an asset manager that I realised (just before my interviewer did) that I didn’t have a notion, so I sought help from our next door neighbour who I knew worked in the financial world. 'Come to Psigma, see the world' he kindly offered, thereby allowing me something to talk about in my forthcoming interviews.

My week’s work experience started a decade ago this week. They took sympathy on me at first and now can’t get rid of me. The pay hasn’t changed much but the world has and every day I feel privileged to have achieved my only ambition, which was to do a job that throws up something different every day.

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2006: Twitter launches

Lesson 2: Don’t try doing things you don’t understand

On my first day at Psigma I was asked to put together a deal ticket for our clients. Having expressed my ability to use various software programmes (clearly a lie), I was supposed to be au-fait with 'Excel'. In fact, the only time I had used a computer was to write my magnum opus dissertation 'The Homeric Hero and Heroism Through the Ages' (copies available on request).

This stunning piece of nonsense concluded with a comparison of David Beckham to Hector, the dashing and patriotic Prince of Troy, and Roy Keane to Achilles, the self-centred and grumpy Greek warrior. My creative 'ability' proved pointless in creating this deal ticket.

I typed in the various numbers for the trades in to this marvellous spreadsheet, got out my calculator and started to add them up. One of our operations guys looked at me in bewilderment and questioned what I was doing. In a state of disbelief, he showed me this 'sum' button and started me off down a very short career as an investment assistant.

To keep the firm safe I was moved away from spreadsheets and on to the investment strategy team soon after, but I recognised from that day that you should never attempt to do something you don’t understand. Understanding the investment fundamentals, taking time to look under the bonnet properly and to check and double check has, over the years, kept us out of life settlements, complicated hedge funds, Russian equities, most structured products and anything opaque.

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2007: Steve jobs unveils the iPhone

Lesson 3: The past is the past; the past is not the prologue

2008 was the first time I learnt that investment wasn’t easy. Having enjoyed the halcyon days during the 2003-07 bull market, I was beginning to think that I had lucked out in my career choice; this investment lark was easy.

How wrong I was. 2008 was a vital period in my investment education, not least because it dawned upon me that experience could actually be a burden to investors. Using history as a guide to the future was extremely dangerous. Interest rate cuts and liquidity alone would not be enough to save the banking sector and asset markets, as many old heads suggested.

For those unburdened with years in financial markets, particularly those with a degree in collapsing classical empires (see my degree was useful), it was easier to plot a course through the treacherous conditions. The past is the past, the past is not prologue, has become a favourite investment motif.

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2008: Lehmans collapses

Lesson 4: The hardest decisions are often the most rewarding

Having assumed the poisoned chalice that was the role of CIO of Psigma in the depths of the bear market of 2008, I was keen to make an early impression.

Having positioned our portfolios extremely cautiously in the early summer months of 2008, my team and I felt it was time to start adding risk back, hoping to benefit from the traditional 'Santa Rally' and a likely inflection point in equity markets. We decided to buy the fund that had the highest bouncebackability and plumped for River & Mercantile’s UK Equity Recovery fund.

For a few weeks at the end of 2008 I was a hero. By early February I was back to being a zero. By the time the markets started rebounding in early March I was clearing my desk. Then the sky cleared and markets boomed in an ultimate 'dash for trash' environment. I was brought back in from the window ledge just in time to see the fund double in a matter of months.

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2009: Michael Jackson dies

Lesson 5: It’s the liquidity, stupid

There is little doubt in my mind that the vital factor for short term investment returns is liquidity. The last few years have taught us that this is the case, as markets have gained despite corporate profits stagnating, particularly in Europe. Even today we see European equities going up on the basis that economic weakness will lead to more QE.

It is also highly debatable whether liquidity is the pre-eminent factor over starting valuation for long term investment returns.

As we look forward we have become more cautious on the US and the UK as it appears clear that the only way liquidity conditions can go is tighter. The exception is Japan, where we feel convinced that Kuroda-san will keep the taps flowing for some time to come. With Japanese equities cheap and policy ultra-loose, the outlook for Japanese equities is bright.

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2010: Greek austerity riots

Lesson 6: Don’t follow the crowd

If I had to describe my investment style in a couple of words it would be 'aspiring contrarian'. My favourite investment lesson of the last decade is to do the opposite of what others are saying. This isn’t just because I am an argumentative fool, but because history has taught that taking anti-consensus views will bring the greatest returns.

This has meant that we have often been early in to new trades, such as Japan in 2011 and Europe in early 2012, but ultimately they have been fruitful. Our latest contrarian bets are in peripheral European banks and Chinese growth names. If I had to pick one as a favoured play it would be China.

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2011: The Arab spring

Lesson 7: Be able to get your money back

Another valuable lesson is that the industry is too quick to forget the mistakes of the past. Certainly we think that fund liquidity is something that investors should focus on, particularly in corporate credit markets. We saw how a change in sentiment can impact illiquid asset classes such as commercial property and hedge fund of funds in 2008, assets that we mostly avoid on liquidity fears.

Liquidity conditions in corporate credit markets have deteriorated over the last few years as market-makers have scaled down their exposure, under the orders of compliance officers and risk managers. If sentiment changes quickly towards high yield credit then some of the big managers could suffer liquidity issues and gates could be raised.

Clients will likely forgive periods of poor performance, but would not welcome being unable to get their hands on their assets when they want to.

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2012: London Olympics

Lesson 8: Policy makers and politicians are the greatest risk to markets

Over the last decade it has been central bankers that did most damage to markets; my “classical education” taught me that it has ever been thus.

The irresponsible actions of Messrs Greenspan, Bernanke and our own King allowed a bubble to build and burst so spectacularly. The greatest mistake in the last ten years was when the lunatic Trichet raised European interest rates in the Autumn of 2008 fighting an inflation scare that was non-existent.

Some central bankers have been able to partially redeem themselves with their post-crisis actions, but we fear that their policies have delayed the pain needed to cleanse the developed world and stored a crisis up for another day.

However, it is the politicians that worry us most. Markets have become much more political in the last decade, with an ever-growing negative influence. Asset markets and certain companies have become political footballs and sadly it seems to be a trend that is worsening.

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2013: Nelson Mandela dies

Lesson 9: The wealth management industry has changed (for the better)

The biggest change in the last few years in our industry has been the increased level of regulation. However, I don’t see this as a burden. Certainly the regulator was right to focus upon suitability and the post-review trend of wealth management firms moving towards centralised investment processes is a great development.

While we must still have investment processes that are flexible enough to allow the service that a client requires, the days of clients of a similar risk appetite having different outcomes has been consigned to history. Having built a process on this philosophy over the last decade we believe it puts us in a great place to deliver in the years ahead.

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2014: Germany win the World Cup

Lesson 10: Trust is the vital component to a successful investment business

I read in a recent article that the average tenure of a fund manager at a firm is five years. So ten years in to life at Psigma it is only right that I ask myself why my colleagues have put up with me for so long. You’ll have to ask them the answer, as after many years of my noise they avoid conversation with me.

My reasons for staying are clear; to be able to operate in a highly stressful market environment it is vital that a CIO has the trust of those around him.

Investment is a difficult business and any lack of confidence can lead to an uncertain mind. An uncertain mind increases the chance of making mistakes. Making mistakes leads to underperformance. Underperformance would mean that I won’t be writing the next chapter of this story in a decade’s time.

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