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

Chapter 10

A New Way to Invest

‘It would be foolish, in forming our expectations, to attach great weight to matters which are very uncertain. It is reasonable, therefore, to be guided to a considerable degree by the facts about which we feel somewhat confident, even though they may be less decisively relevant to the issue than other facts about which our knowledge is vague and scanty. For this reason the facts of the existing situation enter, in a sense disproportionately, into the formation of our long-term expectations; our usual practice being to take the existing situation and to project it into the future, modified only to the extent that we have more or less definite reasons for expecting a change.’

Keynes (1936, Chapter 12, part II)

How should investors invest? There is clearly no easy answer to this question, whether we believe markets are efficient (in which case we cannot beat the market) or relatively inefficient. We have no credible theoretical framework. The goal of this chapter is not to unveil some new detailed and better method to make a fortune (I have no magic insight), but rather to help create a structure within which investment decisions can be made; and more specifically to raise a set of issues and questions to account for risks which may not have been taken fully into account before, and so to create a guide for thought.

Investment theory is still a young discipline trying to find its theoretical way. Moreover, markets are systems impacted by our investment ...