When markets feel uncertain, the instinct is to do something. Yet some of the most successful investing comes from doing less, and doing the simple things consistently well.
That was the thread running through our recent conversation with James Baker of Albion Strategic Consulting. As James put it, borrowing a favourite line from his colleague Tim Hale, investing is simple, but not easy. Get your head around a handful of enduring beliefs and you have done perhaps ninety per cent of the work. The rest, the technical detail, the fund selection, and the discipline to stay the course, is where most investors come unstuck.
This first part looks at the foundations: what to believe, what you actually own, and why trying to out-guess the market is so hard. Part 2 turns to how you build a portfolio around those ideas, and how you stick with it.
Image Credits: Humans Under Management
Start with what you believe
A sensible investment process begins not with a fund or a forecast, but with a set of beliefs. Without them, James points out, you have nothing to anchor to and nothing to measure yourself against. You drift chasing the cheapest fund, or the exciting idea someone mentioned at a conference.
“If you don’t have beliefs, the real danger is you get lost through time.”
— James Baker, Albion Strategic Consulting
The beliefs we hold are deliberately simple:
Capitalism creates wealth.
It is not perfect, but it remains the most powerful engine of long term growth we have.
Markets do a reasonable job of pricing.
Today’s price already reflects what is collectively known.
Volatility and return are related.
Higher expected returns come with a bumpier ride.
Diversification is the only free lunch.
Spreading your eggs across many baskets improves your experience without costing you expected return.
None of this is exotic. The difficulty lies in living by it when markets are testing your nerve.
What are you actually buying?
It is easy to own investments without ever thinking about what sits “under the bonnet”. So it is worth being clear.
When you own a broad equity fund, you are buying a small share in the future earnings of the great companies of the world, from the household names at the top of the market all the way down to companies most of us have never heard of. As an owner, you get to participate in their growth over time. When you own a bond you are doing something quite different: you are lending, to a government or a company, in return for interest along the way and your capital back at the end.
We often describe a portfolio as a gateway into owning a little piece of thousands of real businesses, producing real goods and services for real people. If you believe great companies will keep finding ways to grow, you can share in their fortunes over time.
Why trying to out guess the market is so hard
If today’s price already reflects everything that is known, then the only thing that should move it tomorrow is new information, and new information, by definition, arrives at random. That is the heart of the efficient market idea associated with Nobel laureate Eugene Fama, often called the father of modern finance.
This does not mean prices are perfect. It means the errors are essentially random, and random errors are extraordinarily difficult to profit from consistently. Betting against that is closer to a trip to the casino than to investing.
Over meaningful periods, ten, fifteen, twenty years, the majority of managers who try to beat the market fall short once costs are accounted for. There are genuine exceptions, and we know their names precisely because they are so rare. Picking tomorrow’s exception in advance is a different challenge entirely.
Listen to the episode
This article is drawn from the Purposeful Wealth Podcast conversation with James Baker of Albion Strategic Consulting.
Listen to the full episode to hear the discussion in full, including how these investment beliefs translate into real portfolio decisions and long-term discipline.
Risk warnings
This article is intended for general guidance only and should not be considered financial, or investment advice..
Albion is not authorised by the Financial Conduct Authority to provide advice or to make arrangements in investments, or to carry out any other regulated activity. The views shared in this recording reflect general observations only and should not be interpreted as guidance for end investors or financial advice in any capacity.
Any investment decisions should be made solely in consultation with a qualified and regulated financial adviser.
Wells Gibson Limited is authorised and regulated by the Financial Conduct Authority (Firm Reference Number 731027).
