Investment Philosophy
Our slogan 'Guardians of Your Wealth' sums it up perfectly.
Rigorous risk management serves as the bedrock of our investment philosophy. We echo Markowitz’s insights into the dual nature of risk in finance, steering clear of unnecessary risks while embracing those for which the market compensates. Harry Markowitz (Nobel Prize in 1990) elucidated two types of risk: company-specific and systematic (market risk). Given that specific risk can be effectively mitigated through diversification at no cost, it becomes unnecessary. Since the market does not reward taking unnecessary risks, exposing oneself to such risks makes little sense in the long run. This principle propels us towards a highly diversified strategy with the lowest possible risk level within each risk category, optimizing our chances to capitalize on global economic growth.
The second pivotal concept revolves around market efficiency, which likely accounts for our strategies’ outstanding performance. The efficient-market hypothesis (EMH), as articulated by Eugene Fama in 1970, posits that financial markets promptly and accurately process all available information, leaving little room for investors to consistently outperform the market. Fama identified three forms of market efficiency:
- Weak-form efficiency: Market prices reflect all past trading information, rendering technical analysis futile.
- Semi-strong-form efficiency: All publicly available information is fully incorporated into stock prices, making both technical and fundamental analysis ineffective.
- Strong-form efficiency: All information, public and private, is reflected in stock prices, rendering insider trading futile in the long run.
While EMH has reshaped the financial landscape and fostered the rise of passive investing, it’s not without its critics. Behavioural biases, information asymmetry, and market frictions challenge its assumptions. Additionally, persistent anomalies such as market bubbles and crashes cast doubt on strong market efficiency.
Despite these criticisms, Fama’s work earned him the Nobel Prize in 2013, underscoring the widespread acceptance of EMH. The implications of Fama’s findings for LCI’s investment strategies are profound.
Our approach strikes a balance between passive and active strategies, adapting to market conditions. In highly efficient markets, we favor passive strategies to ensure exposure, participation, and cost minimization. Conversely, in less efficient markets, we pivot towards active management to exploit opportunities.
While our overall strategy leans towards passive, we tactically integrate active elements during periods of irrational investor behaviour. This flexible approach enables us to minimize costs, optimize returns, and effectively manage risk.