Investors, mistakes and Deep Blue thinking in 2020

Jason Liddle, head of institutional, Sanlam Investments

He recounted his much publicised chess encounter with Deep Blue – IBM’s intelligent answer to the ultimate chess playing machine at the time. Kasparov’s experience in defeat was quite mentally and emotionally devastating given that he had never before lost to anyone (human or machine). Looking back he was able to share interesting points of view and learnings. Kasparov contends it was not quite because Deep Blue was ‘smarter’, perfect or had the ability to perform huge calculations swiftly that eventually led to its victory. It was specifically because, within a closed system, Deep Blue was able to make fewer mistakes than he did – a very important distinction. As the command of data and technology continues to redefine our industry I think Kasparov’s experience draws worthy attention. Firstly, it is important to understand that our capital markets (listed and unlisted) are very much open and fluid systems that are susceptible to disruption.

There are no signs of 2020 being a quiet year globally

Globally, the year ahead promises to be extremely eventful and in the first few days of 2020 geopolitical tensions are already on the rise in the Middle East. It now is quite certain that Britain will exit the European Union following the resounding mandate provided by the electorate in their recent elections. The upcoming US elections and political posturing are likely to cause turbulence in the stock markets. Central bankers have meaningfully shaped capital markets in 2019 despite the uncertainty provided by the trade wars and the Fed’s balance sheet continues to swell again, owing to calming repo markets. Slowing economic growth and supportive central bank interventions are not likely to sustain capital markets in the same way as they have in 2019.

Locally substantial structural reforms are on the way

Our own domestic economic woes continue to be shaped by rising debt to GDP, dismal unemployment figures and falling business confidence - not to mention our ongoing battle to keep the lights on. Policy uncertainty around land expropriation and the NHI (National Health Insurance) continues along with errantly run state owned enterprises. Time is definitely of the essence with the 2020 Budget statement coming soon and a possible ratings downgrade imminent. These concerns should hopefully be quelled by ongoing and substantive structural reform.

Investment success in 2020 will hinge on limiting mistakes

In my view, given this unprecedented uncertainty and challenges, investment success in 2020 will hinge on limiting our mistakes and adverse outcomes even though we are not operating in a closed, well-behaved system. In making fewer mistakes and lessening our exposure to adverse outcomes there are three key spines that should be instructive in our approach:

Fewer mistakes start with sound governance

It is important to understand how we make investment decisions and the principles that pro-actively underpin them. It is reassuring that our own fiduciary duties are largely served by sound governance already in place. As diligent and ethical managers and custodians of our clients’ assets we place a high premium on good governance as a firm and necessary foundation. At the outset of the year we recommit ourselves to principled and strong governance protocols that support our investment decision making.

Minimise mistakes by addressing the right problems


It is important that we develop clarity in our purpose and cut through the noise by asking the right questions and focusing on the right problems testing our real understanding of them. Distractions and noise will continually drain resources and invariably lead to ineffective ways in achieving our outcomes.

Understand the source of risk


Understanding the nature and source of risk along with the focus on portfolio construction and systems remains your best tool in managing uncertainty. An investment process characterised by idea generation and strong research remains vital but the most important factor in limiting the amount of mistakes or adverse outcomes especially in a highly uncertain environment will be to develop measured exposures to the various investment strategies used.

For successful investing, man and machine are both important


While Kasparov did eventually beat Deep Blue, we can all learn from his lessons and experience. The reason behind Kasparov’s decision to accept the challenge to beat Deep Blue is interesting. It was ironically born out of the foresight to have human and machine work together in future.