Investors: here’s some real food for thought

JONATHAN GIBSON, Director of Wealth Services at AAB Wealth, says that we can learn a lot about investment strategy by turning on the TV.

If you have ever tuned in to MasterChef, you will know that contestants face a series of cooking challenges. There are so many things that can – and do – go wrong. From problems with low-quality ingredients through to inadequate preparation to poor implementation.

I tend to think investing can be much the same.

There are generally two broad approaches. The first is a traditionally active one, where managers attempt to find mispriced stocks and shares or seek to time their entry and exit points from various parts of the market. This approach is akin to the challenge in MasterChef of having to invent a dish within a set time frame. The supposed advantage is the flexibility of concept. What usually happens, however, is that the chef ends up racing against the clock and is locked into certain ingredients to create a single dish. Of course, it may work out, but if they lose attention for even one second, the dish is ruined and they have nothing to fall back on.

Similarly, in the investment world, the traditionally active manager locks in on their best ideas and tends to find little flexibility to move. They are constricted by time when trying to trade on information they believe is not yet reflected in prices. If it doesn’t work out, there might not be a Plan B!

The second approach to investing is when the manager seeks to track a commercial index, such as the well-known FTSE-100. The goal here is not to stand out, so the manager will be trying to avoid deviating from the benchmark. It’s an approach which is more akin to the MasterChef challenge where contestants have to cook a standard popular dish with set ingredients. The focus in this case is not on creativity, but rather on following a set process.

Of course, the recipe must be followed and created in a set timeframe. The other disadvantage of this dictated menu (or commercial index) is that it may not suit the clientele (or investor). For instance, it may be the world’s best lasagna made perfectly to order, but if your diners don’t care for Italian food, then you have a problem.

Now, what if we had a third approach and a system that combined the creativity of the first approach with the simplicity of the second? In this challenge, the focus shifts from being different for its own sake or following someone else’s recipe to drawing from a range of ingredients to produce a diverse menu suiting a range of tastes. In this third approach, our contestants do not face unnecessary constraints either in terms of time or ingredients. Instead, they assemble a broad selection of dishes from multiple ingredients, which are suitable for the season and can be selected at times of their choosing.

This third way is the optimal approach. When it comes to investing, you don’t have to outguess the market to get a good result. Neither do you have to lock in on a couple of your best ideas and hope they turn out for the best. Above all, you don’t have to throw up your hands and contract the job out to a commercial index provider.

The third way is smart and sensible. Call it the MasterChef of investing!