Capital is cowardly (even in this brave new world!)

Steven Crouse, Senior Financial Advisor

In Aldous Huxley’s 1931 novel, Brave New World, he paints a picture of the anticipated broad changes in society: from reproductive technology to sleep pattern and psychological manipulation, classical conditioning and people’s personalities, all combining to profoundly change society from what the people living then had grown used to.

The headlines nowadays remind me of the expression, ‘May you live in interesting times’. Our daily glance at the media tells stories beyond the preposterous, and we are constantly faced with questioning the logic – or complete lack thereof – of our government and business leaders. It is indeed a brave new world in which we live!

Yet looking beyond the headlines, I am continually intrigued at the flow of capital and its constant need to seek out return. Because the brutal truth, one that we as investors and advisors need to print out and paste all over our offices, homes and other surroundings, is that capital is cowardly! It flows wherever the best returns are available, and flees from the places where those providing it are disadvantaged or the risks of losses are high.

I once wrote an article in this newsletter introducing Mr Market – a character I referred to as a manic-depressive, bipolar drunk because of his wild, moody and senseless reactions to his environment. I detailed how every day he would come to you with offers to purchase or sell assets that were entirely different to those he offered the day before. I could comfortably add the adjective ‘cowardly’ to my description of Mr Market.

In trying to constantly understand, anticipate and, more importantly, capitalise on the behaviour of the markets and the ‘herd mentality’ of capital flows, I remind you that this is where opportunity for growth resides. Because in this brave new world of technology, where every person with a mobile phone and Twitter account can be a journalist, or anyone with a car and free time can be an Uber taxi driver, the pace and flow of capital is likely to be exaggerated. And its constant cowardly reactions to opportunity and risk are likely to manifest as higher levels of general volatility.

But volatility is not always a factor to be avoided. Just as the Cowardly Lion in The Wizard of Oz was initially so afraid, his gift of courage from the mighty Oz was really only an affirmation of his character – and something that he developed himself through the story!

The challenge we must overcome is identifying, acknowledging and understanding both the risks and the opportunities that present themselves every day, and anticipating the direction of the herd while seeking out the inefficiencies that hide the opportunities where returns may be hiding.

But an even greater imperative is to not let capital risk scare us or allow our emotions to override our sense of logic. We must all remember that much the same as the Cowardly Lion, the tools for our growth reside inside us – we just need to learn how to harness them, control them and direct them in the constant seeking out of opportunity. And to remember that it is capital that is the coward, not us the investors!