Notes From my Inbox

Our main message this quarter is the necessary health warning that needs to accompany the new two-pot retirement system commencing in September this year. Under this reform, members of retirement annuity funds will, for the first time, be able to access up to one third of their fund value before retirement. However, as we show in detail here, this new early liquidity option comes with high immediate, and even higher long-term, costs. One of the first principles in finance theory is that optionality, which can be defined as having the flexibility to choose different paths in the future, is desirable, but only if the cost of the option is low enough. Unless you face a dire and immediate emergency, the cost of early access will likely prove too high in most cases.

Thinking about health warnings and finance theory leads me to some investment analogies from the worlds of exercise and diet. Outlive: The Science & Art of Longevity, Peter Attia’s magisterial yet deeply personal book on preventative strategies that can be deployed to improve the quality of life in your later years, was a profound recent read and inspired this quarter’s edition of Notes from my inbox.

The results of numerous studies show that someone in the bottom quartile of fitness as measured by VO₂ max, is at four times the all-cause mortality risk than someone in the top quartile. The evidentiary support for fitness as a marker for physical and mental health is as strong as the support is for considered diversification as a marker for financial health. Getting and staying active and ensuring our asset base is appropriately diversified are two of the best gifts we can give ourselves.

The principle of diversification can also be used to optimise our fitness efforts. Rather than aimlessly exercising or focusing solely on one activity such as endurance cycling or swimming, Attia suggests that we should think about our fitness routine as training for the centenarian decathlon. This is the list of the most important physical tasks you want to be able to do for the rest of your life. Think things like going on a hike, carrying your own groceries, managing your own luggage on a trip, getting up after a fall or being able to pick up your great grandchildren. If we tailor-make our activity to help us retain the strength and fitness levels required to still be able to do these tasks, even when factoring in the inevitable decline that comes with aging, we have a compelling purpose in mind.

This is very similar to one of the first concepts we need to understand if we want to be successful investors. Investment is the effort of preventing a lot of money from becoming a little. It is first and foremost about maintaining the purchasing power of your capital over long periods of time. Under conditions of uncertainty, this requires appropriate diversification. If done well, we should also be able to achieve some real growth without taking inappropriate risks. In the end, all investors need a balanced fund.

The scientific support for any specific dietary regime is much less strong than for the benefits of exercise. One of the problems in the world of diet science is that, primarily for ethical reasons, it is much harder to conduct definitive double-blind studies where a control group is forced to only eat foods hypothesised to be bad for them. As a result, most of the findings that make the headlines, variously telling us that eggs, caffeine, red wine or butter are bad/good for you, are based on poor-quality epidemiological research. These studies often suffer from the correlation/causation problem, also often prevalent in the world of investments.

A side-effect of a lack of scientific consensus is that it creates the opportunity for zealots and charlatans to exploit the information gap by promising false certainty. There are thousands of diet books that promise a sustainably thinner you if you only eat this, but not that. Over the years there have been multiple fad diets, from Atkins, keto and banting, to blood group, vegan or low fat. This focus on finding one universal truth becomes especially problematic when promoted with cult-like zeal. This has an equivalent in the world of investments too. Our reluctance to embrace uncertainty and accept that the future is inherently unknowable, makes us prone to fall for scams where we are promised false certainty and safety. The adage that if it sounds too good to be true it almost certainly is remains as true in the world of investments as it is in nutrition.

One of the core lessons from Attia’s book is that better health outcomes over many decades is not straightforward and requires dedicated, disciplined, and informed activity continuously executed. You must do the work. At Coronation, this is what we focus on. We continue to apply our tried-and-tested long-term investment philosophy grounded in a strong valuation discipline and our own research to make informed decisions as to how to build robust and resilient portfolios that can deliver superior performance while taking appropriate levels of risk. This has delivered an enviable track record over the past 30 years, and we will continue to pursue this objective for the decades to come.

I hope you enjoy the insights in the Autumn edition of Corospondent!

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