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Morningstar Takeaways

by Tricia

Back from the Morningstar conference in Chicago: The consensus from veterans of the Asian market is that Asian markets have re-priced themselves correctly following five years of unsustainable growth. Japan is interesting for the first time in a long time. Experienced managers continue to buy firms with long-term production capability, not short-term value, and advise others to hedge against Asian currency inflation. The main threat to global growth? Unredressed inflation. In other words, too much money chasing too few goods.

An interesting tactical note: In a room of about 150 financial advisors, about 2/3 held ETFs. Of those, one half said ETFs were a key part of their strategy. My question is, how can ETFs be so cutting-edge and innovative if so many people are already using them?

Overall, what I got out of the conference was this: The biggest challenge to globalizing your strategy is rarely operational; instead, the challenge usually lies in persuading people to see themselves as competitors in an increasingly complex global economy, and not to rest on their laurels -- a profound, and profoundly humbling, paradigm shift.

The Global Outlook: What to Watch For

by Tricia

Here in Chicago at the Morningstar Conference, the watchword is complexity. If I had to pick the most important thing to talk over with our clients, it would be the convulsive global environment.

The operating environment is almost completely reversed from what anybody would have dared to say even a year ago. The emerging markets are net creditors, and the US is a net debtor. The $350 billion dollars of market recapitalization came from the Asian central banks, not from the G-7. So did 60% of all global growth. Brazil's sovereign debt rating is higher than that of Citi's. The expectation is that the next massive recapitalization need will be that of the American consumer, whose resilience carried the global economy through the 1997-98 contagion.

That's nerve-racking. Consumer spending is about 70% of the American economy, and the American economy is about 1/3 the global output. In the last twenty years, Americans have had most of their equity stored in the value of their homes. We are right on top of the point where it will make sense for some people to drop off their keys and walk away from their mortgages. Certainly, for the first time in American history, homeowners are falling behind on their mortgage payments before they fall behind on other payments.

As we said in "Future of Distribution," the ongoing erosion to investible assets as well as to margins, makes a more compelling argument for global diversification (as if you needed another one) -- not just geographically, into the BRICs or "developing" (we're going to have to come up with a different nomenclature soon) Asia, but across commodities and industries as well.

When Fancy Turns to Love

by Tricia

When people ask me what I do, I tell them I look for the moment when things change.

Think about somebody you love. Remember the moment that your fancy turned to love? How did you know that something had changed? Was it something you saw, thought, felt, did?

My friend Ray-Ray is a talented professional chef. She says, "Cooking is like life: it's the judicious application of heat and pressure." She tells me that cooking is about knowing when things change. Good cooks see it. Great cooks feel it.

The human eye is trained to detect motion. For me, real research is about finding that moment when everything changes. Nobody ever wrote a good story in which nobody does anything, nobody says anything, nothing happens, and everything goes on as it had always gone on before.

Good research, great novels, and well-lived lives have in common the arc of a human story. Behind the research question, the variables, the dataset, the hypothesis or the thesis; the qualitative or quantitative approaches, there is a material change in the lives of the protagonists.

Research isn't just the facts, m'am. In the age of Google and wikipedia, anyone can dump a pile of data on you. Real research builds narrative momentum behind the facts. It grants insight. When I'm devising original methods, I'm creating knowledge. What's new knowledge? It's knowledge that didn't exist before I made it. And except for a few notable Greek mathematicians, new knowledge doesn't arrive in Eureka moments; it arrives through diligence, practice, and persistence.

When it arrives, new knowledge, in turn, creates insight. Insight shows me how I relate to myself and to the world around me. It suggests different ways to live and connects to me to my humanity -- sometimes, if I'm lucky, to my happiness.

The kind of research I care about isn't about what we know (or think we know): it's about how we know what we (think we) know. What we know drives what we do. What we do informs how we live. All those things together are who we are.

Mind of the Market

by Anu

On Friday, we had a lively debate on topics spurred from Michael Shermer's, "The Mind of the Market." Shermer makes a one simple point. Marketplaces are made of up of numerous people and those people are impulsive and emotional, driven by feeling as much as rational thinking.

He points out countless (literally, thousands) studies that show groups of well-educated, thoughtful people making 'poor decisions' because they were driven by emotion. An interesting study focuses on regret aversion. Usually, people will reduce a potential payout if others are equally (or more dramatically) affected. For instance, imagine you purchased a beautifully made latte at your favorite coffee shop. The barista says, "Hey, you ordered the one thousandth latte! Congratulations, you win a free pound of premium coffee. Everyone else in the shop wins the coffee too." Imagine a different outcome. The barista now says, "Hey, you ordered the one thousandth latte! Congratulations, you are the sole winner a free cup of coffee." More than fifty percent prefer the second outcome, even though it's of less value than the first!

Theories like regret aversion and others are helpful in understanding group dynamics. As strategy consultants, so much of our role is to facilitate discussion that leads to innovative change. Before we can influence change, we need to unlock the door to how a group perceives the risk/reward opportunity from innovative changes. Too many times, organizations disable innovation because they view the 'risk' too great. Hopefully, we can bring forward the opportunity for reward as even greater. I believe people that turn Shermer's theories into practice will enable others to view the reward opportunity.