Pop quiz

a) who this is?

b) what he’s holding?

c) wearing?

d) where it’s taken?

e) what’s it got to do with investing?

d) who’s going to win next year’s Premier League?

This is 6-year-old Roger Federer, future tennis superstar and possibly the GOAT (greatest of all time). With a rugby ball. Wearing a Scottish football kit. In South Africa.

Relevant, why?

Range

It highlights that success, innovation, and breakthroughs aren’t always about digging deeper into a single domain but about crossing boundaries and bumping into new ideas. David Epstein’s “Range” underscores this with Federer’s journey from a multi-sport enthusiast to a tennis icon, much like Van Gogh’s late blooming in art after failed attempts at five previous callings. Good decisions can arise from a cross-pollination of ideas. From GSK’s former CEO citing that its biggest breakthroughs tended to occur with colleagues at the café, Munger’s use of mental models, or Philip Tetlock’s work highlighting the importance of cognitive diversity, the message is clear: breakthroughs occur at the margin of discipline. Now, many boards and investment committees, sensibly, attempt to incorporate this into their decision process. The only problem is that the people (and their incentives) often get in the way. To hack this, some managers focus on physical set-up (co-locating multi-asset traders for example). Others focus on relentlessly promoting a culture of learning, of collaboration and curiosity. They recognise failures are inevitable on the road to success, that marginal gains compound and curiously, are happy to ‘borrow’ (or steal) from the best of what others have had worked out.

Marginal gains

Now, I’m not much of a football fan. I am however, a fan of rugby, cycling, sailing, F1 and athletics – all sports that Ineos’s Sir Ian Ratcliffe has either invested in or sponsored. What’s interesting about this network is they all form part of Ineos X, their sports innovation hub, which is headed by none other than Sir David Brailsford – who popularised the concept of ‘marginal gains’ and led British Cycling to win 60% of all available gold medals at the Beijing Olympics (and several Tour de France titles). What all these teams share, other than a track-record of success, is a relentless focus on learning (which requires intellectual honesty and humility), on improving both process and people and a voracious appetite for data. Now, the hope of Ineos X is to bring new ideas and new approaches from a ‘range’ of different disciplines, to solve old problems, steal new ideas, innovate, improve performance. And win. And their latest partner to benefit from this collective IP? Manchester United. My pick to win the 2025 Premier League.

Good artists copy, great ones steal - Picasso

Oh to be at an off-site with sporting titans like Lewis Hamilton, Ben Ainslie, Brailsford, Ratcliffe, Wolff and All Black coach Scott Robertson – what an innovation lab. From sharing knowledge on the best materials for shock absorption or power transfer from sailing or F1 (like that used in Kimchoge’s running shoes when he ran his sub- two hour marathon) to understanding how the New Zealand All Blacks use data to approach recruitment, player selection and long-term injury assessment to better assess ‘value’. Think about what you could pick up about the latest developments in strength endurance, nutrition, decision making under pressure, performance clothing or how to build team spirit, a unified purpose, via story telling. It’s going to be fascinating to observe how things evolve at Manchester United. If it’s true you’re the average of the folks you spend the most time with, United’s average could soon rise. Dramatically. So – there you have it. My top picks, not only for the League, but next Rugby World Cup, America’s Cup and Olympics are likely to come from the Ineos stable. This is NOT investment advice. Gamble responsibly. And never, never enter the pool by the stairs.

Compounding

Bringing this back to investing, the ‘aggregation of marginal gains’ are just sport-words for ‘compounding returns’. And as Munger would say: avoid being stupid or making mistakes – they also compound (for investors, think position sizing, being too short-termed, selling out). The importance of consistency – being average for above average periods – is also key to long-term success. Take Kipchoge who broke the two-hour marathon barrier: his tactic was to maintain the same average pace for as long as possible and wherever possible not make sudden accelerations that waste energy. I think there’s a lesson there for investing. One that requires patience. Perhaps the most important investment skill of any. And as we are talking behavioral psychology, it would be remiss not to mention the sad news of Daniel Kahneman’s passing.

More to say on him, and his great book ‘Thinking Fast and Slow’, next time.

Lessons from Larry

Speaking of stealing ideas of those who’ve already worked things out, I get a lot of great intel reading investment letters, especially those of Buffett or Blackrock’s Larry Fink. You can find Fink’s latest, here. Pleasingly, I agree with pretty much all of it, having touched on many related topics in previous editions of The Weekender. We’ve also discussed the pensioner crisis, challenged the assumption of bonds as ‘risk-free’, argued for equities being the only asset that can compound real returns and have discussed the role that capital markets play as a vehicle to promote economic prosperity, wealth effects and consumption (see Japan, India, Korea, China and now even the UK government for clues). We’ve written of the need to provide operational support for complex asset owners moving to a Total Portfolio allocation model, of the growth needed in energy infrastructure and of course the divergent narratives around climate, with Shue and Hartzmark logic on one side (abatement/engagement) and exclusion on the other. The only thing I take issue with is his point on gold. He views it a ‘sub-par investment’ for it ‘doesn’t produce economic growth’. (I’ll ignore the fact that bitcoin probably doesn’t either and yet he’s ‘very bullish’ on that asset!). Gold is merely a store of value. It’s defensive, not offensive and he’s all about growth. About hope. Well, I think that’s about to change. I think gold is about to get a rebrand. And, as it does, it could also help to solve the intractable problem Fink poses: too much sovereign debt.

Gold’s about to get a rebrand

Gold’s history is one based in fear. It has proven to be a useful store of value during debasements (inflation) or destruction (war). It’s this branding, I believe, that might partly explain Fink’s dismissal of it. He’s all about the future, about growth, about ‘hope’. It’s why he loves equities, an asset that compounds over time and aligns with human motivation, with our reward networks. With dopamine. With ‘more’. Gold, like bonds, is perceived to be a ‘safe haven’. Bonds protect wealth, they don’t create it. They are boring. They are sought out during periods of uncertainty. But now, with growing debt issuance and inflation volatility, the role bonds have played as safe/reserve assets may be starting to be questioned. This might explain lower foreign central bank holdings of treasuries and conversely, vast accumulation of gold reserves, most notably by China. But what’s more interesting, and why I ‘m talking about gold – again – is this headline from the South China Moring Post: HSBC launches tokenised gold. Yes, HSBC can claim bragging rights as the first to create ‘digital gold’ and make it appealing to a more ‘hopeful’ and simply massive audience, the youth. Should they, along with the WGC succeed to drive a rebranding of it as a defensive asset to an offensive or appreciating one, then I’m prepared to bet ‘digital gold’ may feature in Larry’s 2025 letter. For not only will it attract similar qualities to new assets like bitcoin, but it will also retain its old qualities as store of value. That and it might just help solve for the world’s second biggest financial risk after demography: debt. For ‘one way to fix a debt problem is by increasing the value of its collateral’.

If digital gold was to perform like bitcoin recently, it could eliminate the deficits of most G7 governments. Now that’s a golden incentive like no other.

Fading the experts

I mentioned Philip Tetlock above. He was famously misquoted for saying dart-throwing chimpanzees are better at predicting future events than human experts. The truth is that the experts are a little better than the chimps, but no better than the average punter. He also showed the more famous the expert, the worse they performed. As Buffett said: “forecasts tell you more about the forecaster than the future”. That of course doesn’t stop us listening to them however – blame evolution for that (see pessimists sound smart, optimists make money). You probably remember Greenspan’s ‘irrational exuberance speech’ just before Christmas in 1996 and just prior to a rip-roaring bull market. Those of you in private equity may be hoping for a similar lack of prescience, for the ‘experts’ at the Bank of England have issued a stark warning on valuations being ‘stretched’ and risks of a ‘sharp correction’. Their attention seems to be on private equity and non-bank lenders. They join a chorus of similar experts from the FT to Economist recently talking of risks based on logic that was perhaps more relevant 18 months ago when funding markets were closed, so too IPOs, public valuations were low and rates were moving higher. These conditions have all but reversed. But what this focus does do, and why I believe returns for PE may compress over time (allocated to dividend compounders instead!) is one of the key attributes of the asset class –  the ability to smooth returns – stands at odds with the intent of regulators, including the FCA, to increase transparency in order to better manage risks.

There is, of course, no discernible difference between a publicly listed company and its private counterpart. The volatility is therefore a function of the frequency of measurement. While that’s very short for public markets, it’s about to become shorter in private, which could support money flows out of the more levered, into the lesser levered on lower valuations. As always, manager selection is key – PE will continue to have a role as a diversifier, but it’s maybe more one concerned with risk (think access), than of returns.

Regional alpha

We’ve talked a lot about seeking alpha opportunities at the regional level. But of course, value needs a catalyst to re-rate, save which cheap gets cheaper. We are seeing this in the US where the rally has broadened to include small-caps and value-cyclicals as a reflation narrative emerges. In countries viewing markets as a policy tool, another such catalyst emerges (see Japan, India, more recently China, South Korea and even the UK). And sometimes, it’s simply flow of money that impacts price, and so, perceptions (of value). With this in mind, I was intrigued to read this from a German reporter I follow, “The world's first MSCI World ex USA ETF has been launched in Germany.”

Now, of course, the Index has existed for some time, but the fact it’s now being marketed more forcefully in Europe’s largest economy is a signal worth watching. For if it gains traction, it could attract passive flows into its largest index constituents and two of my favourite markets: Japan and the UK.