Simple investment strategies can be the most deceptive

By Tom Stevenson Published: 6:29PM GMT twenty February 2010

Comments 4 |

Investors are some-more simply swayed of the merits of an investment story if it can be articulated in a judgment or dual as a result the telecoms, media and record (TMT) burble 10 years ago (mantra: "the internet is becoming opposite the world") and the unrestrained for rising markets currently (same story really).

The strong morality of successful investment arguments can be false for a integrate of reasons. First, as London Business School professors Dimson, Marsh and Staunton showed in the not long ago published 2010 book of the Credit Suisse Global Investment Returns Yearbook, the expansion of an industry (technology) or an economy (emerging markets) is no pledge of certain investment returns. There"s some-more to investment than the underlying story - valuations have a difference too.

Evolution earnings to great old fashioned businessman promissory note Tory celebration conference: David Camerons debate in Birmingham in full Labour conference: Gordon Browns debate in full Music college a strike as stone star turns clergyman Nomura enjoys Lehman progress ? but how to keep it?

Second, the investment story itself is customarily some-more formidable than it competence appear at initial glance. This was the box 10 years ago given the genuine winners from the growth of the internet were not the dotcoms or the companies construction the fibre-optic infrastructure, but existent companies that were means to have use of the new record to reduce their costs, suggest new services to their commercial operation or in alternative ways turn some-more efficient.

Today"s big investment story rising marketplace expenditure is building a constrained and elementary account too. It"s called the S-curve outcome and it argues that as incomes climb in building countries there is a tipping point over that there is a fast enlarge in levels of in isolation consumption. This is loyal and elementary but it is usually half the story.

Some engaging research, additionally from Credit Suisse as it happens, has shown that whilst expenditure in a range of areas does in truth climb to one side increases in GDP per capita there are a series of alternative dynamics at work that have capitalising on the direction a rather some-more difficult business.

For example, opposite sorts of expenditure are triggered at opposite levels of wealth. Consumption of necessary equipment such as food and domicile utilities rises neatly at comparatively low levels of resources but utterly fast levels off. In America, for example, food expenditure per head rose fast in between 1929 and 1970 but has been radically prosaic given then.

Consumption of utilitarian but not necessary things that are piece and parcel of a rising customary of vital starts to climb at a higher turn of income and in majority cases has nonetheless to plateau. Spending on transport, monetary services, health caring and housing took off in the US after the Second World War and is still increasing.

Finally, expenditure of some-more optional equipment tends to proceed rising at an accelerating rate at comparatively high levels of income. Rich people outlay an augmenting suit of their incremental resources on distraction and communications, for example.

Of course, if it were this elementary an financier could realistically confirm to buy food and domicile products producers in low-income countries such as India and Indonesia, ride companies in mid-tier countries such as Brazil and Russia and camp bonds in some-more grown markets such as Hungary or Korea.

This would be as well simplistic, however, for a couple of reasons. The initial is that the relations cost of products and services is all the time changing. I can recollect twenty years or so ago weighing up either I could means to have a phone call from Japan given it felt similar to a luxury. Today, it"s a indecisive point either mobile phones should be noticed as necessary or utilitarian so poor have they become.

There are additionally immeasurable differences inside of markets that have generalisations at the inhabitant turn unhelpful. For example, whilst there were some-more than 50 computers for each 100 civic households in China in 2007 there were only 4 per 100 in the farming hinterland. To interpretation that China had changed over the merger of consumer durables on the basement of the civic census data would be to miss an event in the rest of the country.

Demographics is an critical cause as well and in startling ways. Many countries are experiencing fast rises in the suit of the over-65s that competence disagree opposite augmenting spending on education. This is expected to be quite the box in China, where the singular kid process has combined one of the world"s majority fast ageing societies. The justification from Japan in the 1960s, however, is that flourishing lavishness can lead to higher expenditure of preparation notwithstanding a descending school-age race as relatives who grew up in purgation dash out on their children.

What does this all meant for investors? One end is that simply shopping a pacifist index-tracking investment as a proceed of benefiting from the augmenting resources of a building marketplace is a flattering capricious approach. From a area it competence see similar to an attractive, and cheap, proceed in to an rising market. But, with so majority relocating parts, there is no surrogate for rolling your sleeves up and analysing each nation and association on the own merits.

tomrstevenson@fil.com

Tom Stevenson is an investment writer at Fidelity International. The views voiced are his own.