The IBS four
Investing involves taking risks. Investment risk needs to be balanced, however, with the risk that the client can bear financially and the risk that he can cope with mentally.
We define risk as permanent impairment of capital. Eventually, this will result in the client not meeting his or her long-term investment objective.
Gains and losses are asymmetrical. A gain of 56% in year one followed by a loss of 42% in year two, will result in a return of -10%. A gain of ‘only’ 28% in year one followed by a loss of ‘only’ 21% in year two, will result in a positive return of 1%.
Our investment process is explicitly designed to avoid large losses. Large losses destroy the rate at which capital grows. This implies that a sound risk management process will contribute significantly more to meeting the long-term investment objectives than the constant search for the highest return.
“Successful investors look to control risk, first and foremost, with the understanding that the returns will come eventually.”
– Ben Carlson
A sound risk management process needs to be implemented in the good years so that it has a maximum effect in the bad years. It’s a ‘hidden treasure’.
Research has shown that simple decision models outperform expert forecasts. Experts have their decisions influenced too much by emotions and behavioral biases that distort the rational decision-making process.
Successful investors, therefore, take probability-weighted investment decisions that are based on past observations. They do not believe that they are able to consistently predict the future correctly.
“Those who have knowledge don’t predict. Those who predict don’t have knowledge.”
– Lao Tsu
A long-term investment strategy will be successful only when it is executed in a disciplined way.
Studies have been unable to prove that sustainable investing results in underperforming a passive index.
Sustainable investing should, therefore, appeal to investors who are attracted to financial returns as well as the source of these returns.
Sustainable investing is, in our opinion, the preferred way to go forward due to its environmental, ethical and social benefits.
“History moves on, as it must.”
– Rockefeller Foundation
Our exclusion criteria result in reduction of the investable universe by only 30%. However, this doesn’t withhold us to diversify the portfolio adequately.
Sustainable Investing protects an important group of our clients against reputational damage. It, also, help us in managing ‘future financial risks’ in the portfolios of all our clients. An example of the latter is the demise of the coal industry.
We are convinced that active investment management is superior to passive investment management.
We aim to minimize the use of passive instruments. Passive instruments force the investor to ‘mindlessly’ invest in individual titles for the sole reason that they are part of an index.
Investments in companies that are heavily overvalued and low-quality corporations are highly correlated to low negative future returns. These are exactly the kind of investments that we aim to avoid through active management. We also exclude companies that are involved in unsustainable business practices. The relationship with risk management is in both instances crystal clear.
“As time goes on, I get more and more convinced that the right method of investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.”
– John Maynard Keynes
We, therefore, invest for our clients in a concentrated portfolio of high-quality and undervalued companies.