Emerging Markets in an Upside Down World: Challenging Perceptions in Asset Allocation and Investment

Chapter 9

Thinking Strategically in the Investment Process

9.1 THINKING STRATEGICALLY

Much of our discussion so far in this book has concerned problems with standard thought and theories. The next chapter will draw together many of the threads we have been weaving to create a checklist for investors. Our last thread before that concerns strategic thinking, scenario planning and some pointers on when and when not to use standard techniques and analysis. Frydman and Goldberg (2011) have noted how investors change views and strategies, and how traditional finance theory does not typically factor this in. How should investors think about change, and alter their investments and allocations?

There are existing techniques which should probably be used more frequently by investors, such as Monte Carlo simulations. However, strategic thinking – seeing the big picture – is essential. It starts by challenging some traditional assumptions about what the context is. Most of Keynes’s General Theory is a critique of the relevance, in certain conditions, of the neoclassical economic theory dominant when he was writing. Likewise, we need to spend time questioning our existing approaches to investing in order to locate weaknesses where we need to employ new or different methods. This includes stepping back and considering how our collective beliefs might be biasing us. Historical perspective often helps us in this, by thinking of past occasions with similarities to today’s conditions.

Importantly, ...