Investing decisions based on non-financial data

Author: Harry Frouzakis IMC – Certified Investment Manager

Saturday 02 May 2020

When it comes to investing, macroeconomic expectations are of the essence. Macroeconomic expectations dictate us where we are standing on the macroeconomic cycle. So, we can decide our asset allocation in conjunction with what is the expected path the macroeconomic cycle will follow. Macroeconomic expectation is something that we can obtain from several international institutions like the IMF, OECD, OPEC etc. But how can we decide our asset allocation in periods when macroeconomic forecasting is undependable (like nowadays) and when asset prices are heavily depended on a non-financial factor like the current health crisis?

First and foremost, keep clear of any emotion (fear, panic, greed etc.) and analyse anything with isolated rational thinking. Macroeconomic forecasting is a compass to investors, and when we don’t have anything to dictate us the future direction, we tend to be vulnerable to external information. Consequently, it is imperative that we reduce our exposure to potentially biased information (media, peer groups, friends and family – I don’t mean a non-social behavior, but a topic avoidance).

As for information, try to find, or even create, an unbiased and if possible quantitative source of information. By doing so, you will be able to create or observe some trends regarding the current situation. For example, I constructed a spreadsheet where I keep track of daily deaths from coronavirus for several financially important countries and I tried to make some forecasting based on Chinese experience which preceded. Additionally, I tried to gauge the magnitude of monetary and fiscal stimulus that were announced. This information gave me a clear picture of the situation so, I decided to increase my stock exposure in March.

Secondly, a major factor is always your pre-crisis risk management. Holding a strict risk management approach before any black swan arise, when complacency is omnipresent, is your key to freedom of choice. Even if we are able to isolate our investment decision process from emotional interventions and create our own data and information, we can do nothing if we don’t have the necessary freedom of choice. The recent events with coronavirus taught us to always maintain a “crisis capital”. This capital will not only protect us from losses but will provide us with important profit opportunities.

Understandably, there are no cardinal rules on what the exact portfolio percentage of that “crisis capital” is or on how to construct your own information sources. These are dynamic and subjective factors that can be different for every investor, but there are some basic directions, like the above, that we can follow in order to stay alive in the markets on the long run.