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Reflections

The Kings heart is in the hand of the Lord, like the rivers of water; He turns it wherever he wishes.

by Bryan C. Taylor, CFA

November 2011

I recently found myself in Paris at a European investment conference. There were a number of notable speakers in attendance and over thirty countries were represented. Senior economic advisors to two governments, prestigious academics, and global investment strategists were included among a glittering array of speakers. While the primary theme of the conference was global economic trends and portfolio strategy, the primary concern of all in attendance was the growing crisis in the Eurozone and the imminent probability of a Greek Default. Sitting among such luminaries and listening to a rather grim litany of economic statistics, I was struck by a verse from Isaiah: “Behold, the nations are as a drop of a bucket, and are counted as the small dust of the balance: behold, he taketh up the isles as a very little thing.” It was a good reminder that an understanding of Divine Sovereignty is a great comfort in trying circumstances. Further, humility is an excellent trait to propagate as a long term investor.

Despite our best efforts we are not able to foresee the future, and while we can and should seek the best information possible to guide our decision making we must ultimately trust the Lord to further our efforts. In today’s uncertain and volatile markets I see many investors getting sucked in by the “Noise” of modern media and reacting in fear to the daily headlines. Ultimately, the gain or loss in our portfolio makes little difference in the arithmetic of the believer. Do we really believe that God’s balance sheet changes based on our efforts?

Unfortunately, we forget that we are simply stewards of the assets God has entrusted to us, and the Bible reminds us that the primary requirement of a steward is faithfulness. Our belief that we own the assets entrusted to us drives our fear of the future and causes us to act like those who have no hope. Consequently, in the area of financial stewardship, Christians often fail to distinguish themselves from their worldly contemporaries. It is an interesting anecdote that fear leads to irrational decision making and irrational decision making leads to investment failure.

Consider the parable of the talents, was it not fear that led the foolish steward to hide his talent in the ground? The other two servants in the parable took risks with the assets entrusted to them and ultimately produced a positive return. However, such a return is not guaranteed. In fact, the wicked servant alludes to potential losses when he defends his actions to his master. Our world is full of risk and without risk nothing can be gained. As stewards and investors we must evaluate the risk to which our capital is exposed, and we must proactively address such risks. The current fixation on Sovereign Credit Risk in global markets simply highlights the fact that no return is truly “risk-free”. Most investors do not achieve investment success because they fail to accurately assess their own tolerance for risk. Game theory suggests the average individual regrets a loss 2.5x as much as they enjoy a corresponding gain, and yet most investors focus exclusively on expected return when evaluating an investment opportunity. When they do focus on the potential loss or risk of an investment they fail to consider the probable response that such a loss would engender. Consequently, when their portfolio declines or an investment temporarily moves in a negative direction they are prone to over-reaction. Fear heightens such adverse reactions, and often leads to foolish choices. Global investing in modern markets also requires a certain level of humility. Humility is required to recognize that we cannot accurately assess the probability of every potential investment outcome or macro event. A proper understanding of investment theory, diversification, and risk management is essential to investment success. However, as believers, a proper understanding of our role as stewards and an acceptance of the Lord’s command not to be fearful can provide us with a significant advantage as we attempt to navigate the uncertain waters of today’s global investment markets.

 

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Bryan C. Taylor attended

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