One of the founders and chairman of the 300 Club, Saker Nusseibeh, now CEO of Hermes Fund Managers, is devoted, along with his club colleagues, to promoting integrity in finance and investment. The club’s name derives from the 300 Spartans who held off the massive Persian invading force at Thermopylae in 480 BC. They did so not with ultimate conviction that their tiny group would defeat the thousands of Xerxes’s troops but in an effort to ignite and unify other fragmented Greek city-states that had not recognised the threat at their doorstep. In this, the Spartans succeeded. So Nusseibeh and his colleagues, who include leading lights in asset management, are trying to galvanize finance industry leaders to their noble cause.
With a doctorate in medieval history, in addition to his financial expertise, Nusseibeh brings a wealth of historical knowledge to his exposition, allowing him to step back and look at the big picture. When forming the 300 Club, he and his fellow chief investment officers questioned the basics of today’s investment practice, which they see as having parallels with the medieval alchemists who sought to create wealth from nothing.
What Are the Truths?
We believe we live in a globalised world. But as Nusseibeh pointed out, 100 years ago there were no more than 35–40 separate global trading blocs. Now there are more than 200 players — a big impediment to global interaction.
He noted that derivatives are also viewed as a recent financial innovation. In reality, commodity derivatives have been traded in Cairo for more than 1,000 years; farmers sold future crops and even traded levels of risk. He added that market momentum concepts, equally touted as new, were practised by 16th-century Japanese rice farmers.
Nusseibeh argued that further back in time, Stone Age man’s investment decisions were simple: Investment in survival took primacy, and risk management was key, given ultimate prospect of loss of life. In fact, critical risk mitigation was cooperation with the community. In his view, some of these basic principles have been lost in the investment industry. The industry has failed to cooperate communally. Relationships have become adversarial towards competitors, clients, and regulators. With this approach, clients ultimately lose out, and he believes this is not responsible asset management.
Nusseibeh said that we delude ourselves today by thinking we are much more sophisticated in exploring alternative choices. Stone Age man’s real estate investment was finding shelter. We have many more alternative approaches now using complex models, most based on little useful data, with some rare exceptions. He highlighted that in an Amsterdam street, where the same homes have traded since the 16th century, prices have been volatile, illustrating the influence of supply and demand, but perhaps more importantly, of politics.
A more modern example he referred to is the performance of U.K. gilts and the U.S. stock market, which surged during the Ronald Reagan/Margaret Thatcher years because of less political pressure and more credit being pumped into the system.
Stone Age man’s commodities investment was also simple: food and fuel for fire. However, Nusseibeh contends, commodities investment today is embroiled in politics, with the Chinese demand for commodities ultimately driven by political and not economic motives. He added that when China realised its political ideology could not dominate the world, the decision was made to build its economy as a source of power.
Nusseibeh stated that as man evolved, basic tools and trades became corporations, which have been innovative — perhaps too much so. Basic principles expressed by pundits like Mark Twain — “Buy land, they’re not making it anymore”, “Hunger is the handmaid of genius”, and “Many a small thing has been made large by right kind of advertising” — still ring true. The finance industry is no exception.
What Progress Have We Made?
Nusseibeh argues that today we can afford a long time horizon, indulging in fashionable investing, upper money versus assets; this is an advance over short life but can also be wasteful. He explained that the period between 1945 and 1979 exhibited unprecedented stability, allowing the United States to leverage up; given the relatively short time period, these data lack accuracy, yet are now regarded as “normal” conditions.
He stated we have become entranced with patterns, models, and superstitions, with the efficient frontier graphic being an example. When Markowitz developed his investment framework, in the lack of other models, he chose one developed by the U.S. military for a very different use. Eventually this became “science” among economists. Nusseibeh believes this was no science because it ignored human (and political) non-rational elements.
How Do We Define Risk?
In Nusseibeh’s view, risk models, like religion, help make the world understandable but can lack legitimacy. Did the Rothschilds make their initial fortune with financial models? No. They won a bet on the outcome of Napoleonic Wars, a political event. So the European Union today, which had its genesis in mitigating political instability, has heightened political risk in investment decisions.
He questioned whether we can really mitigate risk, emphasising that history echoes but does not repeat itself. Patterns only repeat for a given period, not indefinitely. Nusseibeh pointed to Stone Age tribes that acted as their own regulators, exiling or executing wrongdoers. Today, many people take more out than they put in, facing no downside risk. In the good old days, the enforcement of rules had personal consequences (unlimited personal liability), which he contends ought to be reintroduced.
Nusseibeh said that investment is very old and so are its tools and that common sense always prevails, but only with a long-term outlook. He believes modern investors misunderstand risk; investment may be simple, but it is not easy. In conclusion, he posed a question: “We have confidence boarding the airplane which has proven, repeatable performance. Can we place the same confidence in our investment managers?”