Turn on Javascript in your browser settings to better experience this site.

Don't show this message again

This site uses cookies. By continuing to browse the site you are agreeing to our use of cookies. Find out more

994x385_tbp_sherlock-holmes-and-the-market-conundrum.jpg

Sherlock Holmes and the market conundrum

  • 09Sep 15
  • Bev Hendry Co-Head of Americas and Chief Financial Officer

If there’s anyone who can solve a mystery, it’s Sherlock Holmes. If only he were real.

Not even the sharpest living minds on investing have a good clue what’s coming next.

Oracle of Omaha Warren Buffett admitted in May that he had been “wrong” about interest rates. Global investors continue to struggle in the quest for signs of what the future will look like – for interest rates, for China, for energy, for Greece. It’s an enigma everywhere, making the financial markets one of today’s greatest mysteries.

Despite being a fictional character, there’s a lot Sherlock Holmes can teach us about investing. Or at least, how to approach the way we invest. Because solving a good riddle is as much, if not more, about accurately deciphering the evidence.

Here are five quotes from the stories of Sir Arthur Conan Doyle and the broader lessons they carry.

1. “The emotional qualities are antagonistic to clear reasoning.” –The Sign of the Four

So important, yet so easily forgotten. When events deviate from our expected path, it’s easy to assume the worst. Emotions like fear take over, and we often forget why we set out on the path in the first place. It isn’t wise to let these emotions take the lead because there’s usually no reasoning behind them.

Investors probably had a clearer mind when they first decided to invest in a particular asset. Making those kinds of decisions and first steps require hours of due diligence. Unless something is about to go horribly wrong – and you’re sure of it – second-guessing a reasonable decision based on negative emotions may not be the best route. As our Head of Emerging Markets Devan Kaloo previously put it, “stay in the car.”

Investment lesson: Practice patience.

2. “There is nothing more deceptive than an obvious fact.” –The Boscombe Valley Mystery

The markets can be turbulent. That is obvious. It’s even more obvious that the markets are often either directly or indirectly impacted by a magnitude of external events, including politics, fiscal policy and consumer behavior.

"There is nothing more deceptive than an obvious fact."

The value of looking beyond the obvious is finding more meaningful clues, ones that others might have overlooked. This is why we prefer to pay more attention to the fundamentals – of a market, of a company to invest in – rather than to what’s trending at the moment. There’s always more to the story than what you see.

Investment lesson: Observe carefully.

3. “We balance probabilities and choose the most likely. It is the scientific use of the imagination.” –The Hound of the Baskervilles

It seems from this quote that Sherlock Holmes knew a thing or two about risk and diversification. Understanding the macroeconomic landscape well enough to determine what asset classes will best suit a portfolio is no longer enough.

Risks are more intertwined than they have ever been. Investors now need a deeper understanding of how these risks play against each other, and they must use that to build a diverse portfolio that best supports risk mitigation.

Investment lesson: Diversify deliberately.

4. “In solving a problem of this sort, the grand thing is to be able to reason backward.” –A Study in Scarlet

Sherlock Holmes attests that reasoning backward is a very useful tool but not often practiced. Most people, he says, tend to reason forward.

Reasoning backwards is a fancy way of saying deduction. Simply put, gather all the facts before coming to a conclusion. As investors, this puts us in an odd position. It’s hard to assemble all the evidence when the evidence is being made as we speak. We invest in what’s going to happen in the future, which means there’s only so many facts available to us.

But there is one important deduction to be made about investing. The general rule about the markets is that there will always be downswings and upswings. And there are some facts we can already see – that, historically, the markets have always gone back up after significant downturns. The world survived a global financial crisis. And even though many of us are arguably still feeling the aftermath of it, we made it through.

Investment lesson: Keep perspective.

5. “Education never ends, Watson. It is a series of lessons with the greatest for the last.” –The Red Circle

While it’s important to remain focused, we would hardly encourage anyone to stay siloed. The markets are always constantly evolving, and sometimes investors must deviate from their initially chosen path. It’s valuable to know where and when to draw that line, but doing so requires us investors to keep educating themselves on what’s happening around the world.

We operate on a “bootstraps” mentality, believing that the best education is hands-on. So we pay companies a visit throughout the year to see if it’s worthwhile for us to begin or continue investing in them. Doing your own detective work means you can spot things others miss.   

Investment lesson: Stay informed.  

The markets are not elementary, but with greater understanding, they can become less of a mystery.

Ref: 23211-030915-1

 





This Content Component encountered an error