Geopolitical Alpha

Chapter 11Geopolitical Alpha

For much of the past decade, I've worked in finance as a strategist, which requires me to think in narratives and themes but not actually pull the trigger on trades. A navigator plots the course for the airplane, but a passenger wouldn't want him behind the controls actually flying the thing. The execution of investment themes is left for the pilots, the investment professionals who know how to structure a trade to take advantage of a well-articulated strategy. Those are the true “ballers and shot callers” of the financial profession who always humble me, particularly when it comes to implementing my forecasts in the actual marketplace.

I make this distinction lest readers confuse my framework for a trading rule.¹

But what I do know how to do is beat the market on geopolitics. The market is not very good at pricing geopolitical risks and opportunities because its behavior is dictated by investment professionals (and retail investors), who all have different time horizons. While they may have good reason to both sell and buy Apple stock at the same time – likely due to their differing time horizons – volatile market reactions indicate they don't know how to price geopolitics. I see a fundamental skills mismatch that creates an opportunity for those investors willing to broaden their skill set.

In Chapter 1, I asserted that the global community of investors has become over-professionalized and overquantified. The CFA curriculum has no section dedicated ...