“Does volatility in market prices equal risk?”

“Volatility in market prices can be an indicator of risk, but it is not necessarily equal to risk. Volatility refers to the fluctuation of prices in the market, whereas risk is the potential for loss or the uncertainty of an investment’s return. While high volatility may indicate a higher level of risk, it is not the only factor that determines risk. Other factors such as company fundamentals, macroeconomic conditions, and investor sentiment can also affect risk. Therefore, volatility should be considered in conjunction with other risk factors when evaluating an investment.”


We have quoted everyone from Warren Buffett to Kim Kardashian in our monthly comments, but this month we thought we should ask ChatGPT for its thoughts on an important topic.

ChatGPT’s answer to our question is impressive.  It is clear and coherent, and its balanced conclusion is right and uncontroversial.  However, could we turn over what we do?  It is helpful to know that we could take into account ChatGPT’s perspective, but it lacks judgement and of course accountability.  We asked it more specific questions about companies and financials and received answers that looked equally compelling but had errors and omissions that were apparent only because we know the facts.  What is more, when we asked the same question more than once each answer seemed similar at first but had different issues.  Our experience holds important lessons for investing and other things:  An algorithm may be able to analyze data and to provide outputs based on patterns and correlations, whether it is ChatGPT or a systematic trading system; but there is no substitute for knowledge, judgement and consistency. 

Our core conviction is that investing in companies that have quality and value for the long-term is a time-tested and proven way of preserving and increasing the value of assets.  We think this is all the more important in the current environment.  A global economy with strong and sustained growth, nominal interest rates of 4-5%, inflation of 2-4% and real interest rates of 0-2% is something to look forward to, not to fear.  Market valuations have reset and are fully compatible with these levels of growth, interest rates and inflation. Nothing has changed about the fact that equities are the primary asset class that can generate real returns for investors.  However, there will be more winners and losers, and quality will matter more.  Companies that have the quality we look for have strong competitive positions, the ability to innovate and to grow, pricing power, the scale to offset cost increases and strong balance sheets, which enable them to invest in growth or to buy other companies.  Those companies will prevail and others will fail.

We invest in companies, not markets, and the results reported by the companies so far this year have been resilient.  The longer the duration of corporate and consumer spending, the stronger it has remained.  Our industrial companies have reported significant increases in sales and orders, in some cases with doubling backlogs and robust margins as they have been able to pass on cost increases.  ChatGPT and other AI applications that will have an increasing impact on our lives will drive demand for semiconductors and cloud computing.  Likewise, luxury goods companies have reported strong demand and pricing power.  As our colleague Zhixin Shu discussed last month, we believe that Chinese consumers have accumulated savings that could be as high as 5-10% of GDP by some estimates and will add to this demand.  We see a slowdown in more discretionary spending in areas like corporate software spending or lower end consumer spending, but it is to be expected and is likely to be temporary. 

We think a Goldilocks economy is the most likely outcome this year.  Bulls and bears will continue to clash as economic data will come too hot or too cold.  That is why this year is likely to be as volatile as any year, but fundamentals and valuations will prevail as they always do.  We agree with ChatGPT that market volatility does not equal risk.  On the contrary, mispricings like we had last year offer opportunities for long-term investors and we will look to use our knowledge, judgement and consistency to buy great companies at great prices whenever we can. 

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