I SPENT a rainy day during the summer holidays together with my “conviction model.” Investors basically want to know whether the market is going up or down, which I fully understand. Here, I use the conviction model for a disciplined way of assessing changes in a large number of variables. In reality, this work is the basis of the final assessment, up or down, so such a day is quite important.
In my opinion, there is no right or wrong way to a good return and there are several ways to go. My assessment is that right now, investors are facing a period where one can choose to surf the markets based on one’s gut feeling for market movements. An example is that I currently consider the financial markets to be more robust than they have been, and for some investors, this may be incentive enough to increase the allocation to stocks, credit bonds, etc.
In the search for returns, one can also choose to work with a conviction model. Here, the abovementioned considerations about market momentums are certainly important, but this assessment does not stand alone and is combined with a large number of other factors, adding complexity to the work.
Working with a conviction model does not necessarily lead to a higher return, especially not during positive periods, but over the decades I have learned to think in the conviction model because it enhances the work discipline, which I think is a better way to incorporate new developments/trends.
Then there is, in my opinion, the most important reason for a conviction model, namely that it is a good way to describe the premises for one’s own assessments and investments.
This is unbelievably important when an investment or assessment goes awry, as the reason is often a change in the premises that created the basis for the investment decision.
When this happens, it is often a signal that one needs to exit the investment, and the half-truth behind a good return over time is to leave investments as quickly as possible when the premise for the investment no longer holds. Therefore, a rainy day together with the conviction model can very well turn into sunshine.
The conviction model is currently under a sort of pressure due to the numerous changes that characterize the financial markets for the time being; this is further intensified for a number of other different reasons. It is so extensive; it cannot possibly be described in a single column. This may be because the global economy is still in turmoil and must first find a new equilibrium, but the global economy may also be undergoing major changes that we may not even be able to describe yet, which is not impossible.
The US is currently experiencing the fourth-highest period of inflation since the Second World War. It requires a good deal of alternative thinking and economic imagination to conclude about the final consequences of this. I don’t know if I am capable of doing all the thinking myself, though my perception of the political leadership in many countries is that they want a global economy that will return to the way it was, which is happening in some countries — even outspoken in several countries in the eurozone, particularly those who were close to zero growth before the Covid-19 pandemic. In other countries, the economy might be heading in new directions, where I expect this direction to become clearer once the inflation calms down.
An investor will probably be surprised when, for example, watching the German news about labor shortages while at the same time economists are outdoing each other in predicting how quickly Germany will go into recession. I consider these to be examples of many imbalances in the economies, and for me, its unknown territory where the new balances will settle.
One of my findings from the conviction model naturally deals with the expectation of a coming recession in the Western economies. Households in several large economies, as well as in the entire OECD (Organization for Economic Cooperation and Development) area, are experiencing a shrinking disposable household income. One consequence is that consumers have to choose where to cut consumption and streaming services have apparently already been cut in many American households. Conversely, everyone in the Western countries clearly wants to travel, so much so that it has given the southern European economies a much-needed boost in second-quarter GDP (gross domestic product).
My immediate thought is that many countries may rather experience a partial recession, with some sectors struggling, while others will continue the activity at a relatively reasonable level. So, if you like to work with elements from the conviction model, then a next step could be to identify the sectors that will be hit by a partial recession in the next 18 months as well as which sectors will come through unscathed.
Peter Lundgreen is the founding CEO of Lundgreen’s Capital. He is a professional investment advisor with over 30 years of experience and a power entrepreneur in investment and finance. Peter is an international columnist and speaker on topics about the global financial markets.