OCTOBER 2012                                                                   Download PDF Version

The Wheel of Fortune

or

Follow the Asset Bubble                                                                           






Last quarter’s newsletter focused on the story of the Seventh Nizam of Hyderabad and how his wealth, which in today’s terms is estimated to have been $211bn, has now completely dissipated with his grandson now living in a small flat in Istanbul. 

Beyond the conclusions reached in the last newsletter, the Nizam’s fate sent me looking for the other candidates who could rightly claim to be the ‘Richest Man in the World’ in their particular decades; what had happened to them? The above are my candidates for the title.

On the basis that I anticipate some readers having difficulty putting names to all these faces below is a table which reveals all, and includes some other relevant information.















A great many interesting discussions arise from the above table, and could lead this newsletter in multiple directions. However, I will merely make to the following observations:

  1. The USA was the ‘super power’ for three quarters of the 20th century and therefore it is not surprising that over 50% of the list is made up of Americans;

  2. Equity fortunes are made in new frontiers, be they technological or geographical;

  3. Sovereigns, which would have dominated the list in earlier centuries, only appear twice; and

  4. With the exception of the Saudi royals and the recent ‘winners’, Bill Gates and Carlos Slim, the relatives of the others on the list, although still carrying resonant surnames, no longer come close to the top 100 or even the top 500 spots in the rich list. The wheel of fortune has turned and their wealth has been eclipsed.

LESSONS FOR THE POOR(ER)

The main lesson from the rich list is that fortunes were derived from an exposure to one specific asset class and, broadly speaking, when this asset class fell out of favour the wealthy individual’s fortune waned.

The table below shows the performance (in US$s) of the four main asset classes of equity, bonds, real estate and commodities, plus inflation, for the past four decades. It clearly shows that there were asset classes to invest in and, equally important asset classes to avoid. Also, if a real return in excess of inflation is a client’s objective, then the table shows that the inflation ‘hurdle’ is frequently not jumped by many asset classes over long periods of time.












CONDITIONS MATTER

An investor and investment advisor’s job, therefore, is to make projections on the best and worst asset classes over the foreseeable future, and to project the returns they expect to achieve.

How can investors form these views? It may be simple to say but not necessarily simple to do. At Clarmond we analyse both the economic environment and the monetary environment, and it is only through synthesising data from both of these areas that a complete view can be obtained. We use the quadrants below as a user-friendly way of thinking about the investment landscape.










Looking back at the previous decades what do find?



















If we now turn to the fourth quarter of 2012 we are projecting sub-trend growth and increasing inflation. How should these conclusions be best applied to a current portfolio?

REAL RETURN PROJECTIONS

As mentioned in earlier in this letter and emphasised previously in the first quarter’s letter, ‘The Money Illusion’, real returns should be an investor’s main concern; wealth cannot be preserved on nominal returns alone. 

Below the four main asset classes are ranked according to the projected real return that Clarmond anticipates receiving from them over the foreseeable future, as long as the current conditions prevail.

Real Return Asset Rankings: September 2012


Importantly, projections are not set in stone; they change as markets move. The graph below shows how the ranking of the various asset classes has changed every quarter since 2008.



CONCLUSIONS

To keep the Wheel of Fortune turning in your favour, projected asset return and subsequent asset allocation become the key components for maintaining and growing wealth.

The past demonstrates that asset bubbles form and re-form in various assets over time; we ignore such lessons at the peril of our wealth’s stagnation. When the Wheel of Fortune turns away it does not return - as can be attested by the lonely occupant of an Istanbul flat.

 

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