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The Artful Trader | Series 3 | Episode 6
Confidence is in the process
Join us as CMC Markets UK Chief Market Analyst, Michael Hewson chats to Mouhammed Choukeir – the Deputy CEO and Chief Investment Officer at Kleinwort Hambros. In the first UK-based Artful Trader episode, Michael and Mouhammed discuss the benefits of consistency and using an evidence based approach to drive results when trading or investing – regardless of short-term market movements. Mouhammed also walks us through his personal experiences in the markets and his thoughts around how data and technology has changed the financial landscape.
Mouhammad Choukeir is the deputy CEO and Chief Investment Officer at Kleinwort Hambros. He heads up the investment management, credit, banking and trust divisions and is responsible for the firm's growth strategy including technology transformation.
Mouhammed Choukeir: In terms of having absolute confidence in financial markets that's impossible. Even the most seasoned investors and those with impeccable track records will tell you, you cannot ever have that 100% confidence. The key to prudent investment decision making is consistency.
Michael Hewson: From CMC Markets this is The Artful Trader.
Michael: Hello and welcome to The Artful Trader. I'm Michael Hewson, Chief Market Analyst at CMC Markets UK. In our third season, we talk to the experts in their own fields to uncover what gives them the confidence to succeed. We uncover confidence, unlocking the secrets behind resilience, preparation and growth and how it can make you a better trader and investor. Today we're speaking to Mouhammed Choukeir, Deputy CEO and chief investment officer at Kleinwort Hambros. Mouhammed chats us through how technology and data has changed the financial landscape and how harnessing its power can help us to make better investment decisions. We'll hear how for Mouhammed an evidence-based approach is the key to confidence as well as some stories around his personal journey to the markets. Mouhammed, thanks for joining us on The Artful Trader.
Mouhammed: Thank you.
Michael: I thought we'd start by basically looking, I think back at what first interested you in finance programming? Was it something that was nurtured at a fairly early age or did you sort of organically find your way to a computer programming job at IBM?
Mouhammed: What led me first into my interest in technology is essentially trying to figure how things work and specifically how computers work. And that led me to study computer science and start my career working for IBM and in the tech sector. And as I was in that sector, I had the opportunity actually to work in IBM for the banking and finance team, which was a catalyst for my wider interest in how the global economy and financial markets worked. And I felt taking some of my background in technology and my interest into solving a bigger problem, which is global markets and the global economy was the natural next thing to do.
Michael: And the financial crisis at the end of the nineties and 9/11 sort of developed that and you felt that because of the .com bust, you felt there was potential for technology to try and identify value?
Mouhammed: Yeah. What I actually learned very early on in my career is how financial markets were driven by a lot of human emotion. I witnessed that as you say, in the late nineties but then we saw it again in the financial crisis. And really my interest was always thinking about how we can offset some of these human biases using tools and technology to try and to address some of their shortcomings.
Michael: It sounds to my foreign exchange focused eyes, you could be talking about technical analysis?
Mouhammed: Yeah, so actually technical analysis is part of the decision making, but you're absolutely right. It's essentially looking at the different data points to help make better investment decisions, and those data points can come in the form of price movements and technical analysis. But equally from fundamental data and what does fundamental data tell us in terms of the prospects for a given company, a sector or an asset class and does it have some predictive value? And so it's essentially using data to drive the investment decision making rather than it being interpreted just using human biases.
Michael: In terms of investment framework though, I think with so many stocks to choose from and as a small investor or a small retail investor trying to arrive at a trading decision based on all of these factors. Sometimes it's easy to outsource these decisions to say someone like yourself but let's say for example you want to try and branch out on your own, what gave you the confidence to think that you could take the step from being a computer programmer to trying to predict future movements in financial markets. And on what timeframe were you looking to try and develop that model over?
Mouhammed: In terms of having absolute confidence in financial markets that's impossible. Even the most seasoned investors and those with impeccable track records will tell you, you cannot ever have that 100% confidence. I would say the key to prudent investment decision making is consistency. And what I mean by that is when making an investment decision, you use the same set of principles, same set of indicators to make that decision. If you flip flop between different decision making, sometimes you are driven by growth, sometimes by value, sometimes you're looking at fundamentals, sometimes technicals, that tends to lead to quite a scattergun type approach and that has many downsides. I think consistency is key and that's how you gain confidence is by applying the same methods time and time again to see what works and then tweaking it along the way.
Michael: Do you use momentum in terms of how you define an entry and exit point into your trading model?
Mouhammed: Yeah, so momentum is actually part of the framework we use. Our framework is called VAMOS. It has three components. The VA is for evaluation, the MO is for momentum and the S is for sentiment, and the MO for momentum is just a recognition that actually any trending asset, if it's positively trending tends to gain in attention and that tends to feed on itself. It becomes a self-fulfilling prophecy and that leads to price appreciation. Equally, when an asset is falling out of favour and we see price declines, then that tends to accelerate on the downside. So using momentum as an indicator, as part of an investment process in our opinion is not only intuitively correct but actually empirically correct. We can see that in a lot of the data, momentum is one of the key risk premiums in financial markets. So, yes, we do look at that.
Michael: In terms of external drivers and there's been an awful lot over the course of the past 10 years. Concerns about China trade, risk of the Eurozone, breaking up. How much does news flow affect your overall investment decisions?
Mouhammed: Yeah, so given our time horizon, we did a lot, our time horizons anything from five years onwards, just to give you an idea. We've done a lot of research to say should we adjust the portfolios given some of the uncertainty around the geopolitics, some of the current uncertainty around the global economy and so on and actually our research shows that if your time horizon is anything over than one year, you should ignore that noise. We observed since 1950 did research on all geopolitical uncertainty and all events that had that element. So Cuban missile crisis is a good example in the 1960s, September 11th, the Gulf Wars, et cetera, and what we saw is 12 months later, the equity market was up 75% of the time. So that means that actually three out of four times you would have been better off just staying in the equity market and not worrying about the noise. Obviously in the short run, that's a different story. If you're a trader, it could drive the price immediately. So depending on your time horizon, you can either pay attention to it or ignore it. In our case, we ignore it.
Michael: That's looking back, 9/11 the US stock market was closed for quite a long time. That's a very brave call to make if you're sitting on a portfolio, it's dropped massively in value and you're worried about getting out of some of your positions. How do you forestall the impulsive nature of trying to get out of a position because you're worried you might not be able to get out of it?
Mouhammed: Yeah, so this is a human reaction, right. There's essentially that fear in that moment, and that's essentially you're trying to protect the asset because emotionally you don't want to lose it even though the rational decision might be to stick with it. And so one way to adjust for that, and they are the most difficult decisions to make and that's investing in times of distress. Is to again have a process that guides you based on data, says actually throughout different periods of stress you would have been better off sticking with your position and or even doubling your position rather than exiting. Exiting would have been the wrong decision to make. And that gives you a bit more confidence. It doesn't, again, the challenge with what I've said to challenge myself on that is that it doesn't mean to say that it will work every time. There'll be times when you're punished for making that decision, but more often than not, you will be rewarded and that's what we're looking at.
Michael: See that's an impulse that I have to fight. If I have a losing position, for example, your model would suggest at the extremes that you pyramid, so you buy more
Michael: into a losing position, which as a trader I have to fight back against the impulse to do that because I've been taught that's a license to lose money. You're saying on the basis of your model and in times of distress, sometimes that's a good opportunity to get back in to coin a metaphor 'buy when there's blood on the streets'.
Mouhammed: Yeah. So that's the, nicely sort of segues into the S of VAMOS of sentiment, essentially to build a position and to essentially be active when there is blood on, when there is an overly negative prevailing mood. Equally, when there is overconfidence, when there is a prevailing mood of euphoria, that's the time to be cautious. One of the things we found with the VAMOS framework is essentially your, again, diversifying some of the risks that you cite because actually the scenario you present in a falling price, it means momentum is typically negative. That will lead us to reduce position. But if there's value we won't reduce it totally. But if there isn't value, if the market is expensive and a negative trend and the prevailing mood is overly positive, that's the time to get out.
Michael: One of the big problems I have is that sometimes my intuition basically tells me one thing and my discipline or my risk management tells me something else. How do you try and stop your heart ruling your head?
Mouhammed: Yeah. I think a starting point is recognizing how you're making the decision. If you're making it with heart and with, in some cases inherent biases, then you run the risk of making the wrong decision. I mean we just have to acknowledge that it's just part of being human we have inherent biases and emotions, you know, so whether it's anchoring bias, you know, it's just the first data point we approach and see that becomes the most important data point. Equally confirmation bias, finding information that confirms our thesis, looking at overconfidence and feeling that we actually know more than we actually do. These are all inherent human characteristics, and the first step is to recognize that we all have them, nobody doesn't have them, and be disciplined to use other things to help you offset some of those emotions. And that's part of the reason that, you know, our philosophy is rooted in evidence and data is to help offset some of these human biases.
Michael: Was there a time that you underwent a Eureka moment, I need to be much more evidence-based and rely less on my instinct?
Mouhammed: Yeah. I would say I.
Michael: Without giving away too many secrets?
Mouhammed: No there's no secrets, I'm very, very happy to be open about that. I've made investment decisions based on the process and I've made investment decisions based on gut feeling and I've got more investment decisions wrong based on gut feeling than those that I did using the process. And that taught me a lesson to say, actually, whenever you are facing an investment decision, if you start to become vulnerable to these emotions, step back and look at the data, look at the process. So it's, again, it's a natural human trait and we're all exposed to it and that's something, it's just recognizing that it exists in all of us is the first step to fixing it.
Michael: And you still do that now, you have to fight that impulse?
Mouhammed: I have to fight it. Of course. Yeah. I, you know, I haven't been able to program my human nature. I'm still having to fight that. And the way that I try and address that is again, by actually letting the process drive the decision making. One of the mantra points that we have in our organization is we have a star process, not a star manager culture. And that's quite an important point is to say let the process drive the decision making is bigger than any of us. And our job is to make sure that it's as robust as possible.
Michael: You've got a process stick to the discipline and the process and the strategy should take care of itself?
Mouhammed: There are so many different ways to make investment returns and to make money, right. There is no hundred percent right or wrong way. Everybody will have their own approach. But historically there's been only two ways to lose a lot of money and the first one is not to have an investment process. And then the second one is to have a process and not follow it. And that's why I mentioned earlier consistency is key here, is have a process, follow it with discipline and then tweak it over time if you need to, but if you don't have a process, you run the risk of you know, having a very bad decision making.
Michael: And you have full beliefs, I believe in terms of having an investment philosophy and following that process?
Mouhammed: Yeah. And I think it's important to have sort of an investment philosophy or a DNA if you like and it drives and it governs our behaviour. And the four beliefs are as follows, we feel, you know, the key to prudent investment decision making is number one is to get the big decisions, right. Number two is to take risk only when risk is well rewarded. Number three is to avoid large losses and four is to invest responsibly. And very briefly on each, the getting the big decisions, right. As we come in every day and there are so many decisions we could be making and the reason that we say focus on getting the big decisions, right, and say, what is the actual biggest decision that needs to be made in order to drive your portfolio returns? Is it the picking of that individual stock or is it more should I been in inequities or not?
Michael: Or do nothing?
Mouhammed: Or do nothing. Exactly. And I think set yourself the big question before you spend time answering. Taking risk only when it's well rewarded is exactly your point there is actually sometimes doing nothing is the right thing. Don't just take risk for the sake of it. And more often than not actually doing nothing is the most sensible thing. Avoiding large losses very briefly on that is the biggest risk that we run is the risk of losing money. And so it's just recognizing what are those environments that create that period of huge losses. You know losing money, 2%, 3%, it's part of being an equity investor. But actually what we want to do is to avoid those big losses and so we spend a lot of time looking at what environments create that. And then the last bit about investing responsibly is actually looking at businesses and looking at the sustainability of what they do. Whether it's the sectors they're in, whether it's the way they govern their businesses, because again, we feel that a sustainable business model, thinking about the prevailing environments around them are likely to succeed much more than those that don't think about those things.
Michael: We had an interesting conversation I think a few weeks ago about artificial intelligence and how you use that within your VAMOS framework. Well actually we sort of debated what AI stood for didn't we, it was augmented intelligence. What is the difference between the two and how does it help you in your investment philosophy?
Mouhammed: Yeah, there are so many definitions of artificial intelligence out there. One definition is essentially machines doing what is typically required by human intelligence. And that could be very simple things like speech recognition, like decision making, translation, et cetera. Another definition or a purer definition is essentially machines able to think and learn. And that is obviously a more demanding task on the machines. In terms of the first definition, I think that's already happening, right. We can see machines are able to understand speech, they are able to recognize it, they're able to build that into their knowledge set and make decisions using it. The ability to purely think and learn is a much more demanding aspect of it. And the reason we use augmented intelligence as opposed to artificial intelligence is actually going back to the principle and say use the data and what it tells you using historic analysis and prevailing data points that a human couldn't process and use that to help you as a human make investment decision making. So that's where it becomes augmented rather than just purely artificial intelligence.
Michael: And it allows you to cover a much wider range of assets?
Mouhammed: Exactly. You widen the scope of what you can process. You are able to run analytics and data sets that you wouldn't typically be able to do as a human. I think the challenge for us is, and a challenge for anybody that's processing data is how much, not information do you feed it, but how much in the way of rules do you give it. Is it totally blank piece of paper, say here's the data, go figure stuff out and not give it any rules at all. Or do you actually have a little bit of a lead in terms of dangling a carrot in terms of some of the things that you want it to look out for? And if you don't give it any rules at all, you typically find actually there is very weak relationships and very weak predictability in terms of asset classes. So you have to guide it a little bit from what we've seen so far.
Michael: So it's really about inputs. Whatever you put in, if you put rubbish in, you get rubbish out?
Michael: Obviously, that human component has its own biases. It has its own emotions and prejudices?
Michael: So the AI will work, but it will also have the same biases, the human biases of the person who's inputting that data?
Mouhammed: Yeah. To give you an example on how you could sort of lead the computer in that respect in terms of rules is, you know, we have a fundamental belief around valuation, I've already discussed that. So what we are actually feeding is valuation data and say, based on everything we've read and researched and analysed, we think these are valuation metrics that have predictability. Go and analyse them and tell us how useful they are. So that's a little bit of leading the processing of the data as opposed to saying here is all the data that ever exists in financial markets and tell us which one has the most predictive value. Those types of exercises typically done in a pure way that give you very, very low predictability. So you have to sort of give it a little bit more information rather than just let it be totally a blank piece of paper.
Michael: So you have to give it a bit of a steer?
Mouhammed: A steer. Yeah. And I think this is the key here on the way that the technology is used is having a predefined set of principles and rules that you adhere to and then just sticking with them consistently rather than you know, changing the method every single time you know new data arrives.
Michael: The process?
Mouhammed: The process and that's one of the most critical things. You speak to investors and you read some of the books that they've written. So many different ways to make money. You think about Warren Buffett and George Soros, two very successful investors, different approach, but they do have something in common and that is the discipline to repeat their process time and time again. So, and that's the key here is that having that repetitiveness in the investment process.
Michael: Which is key in terms of longevity?
Michael: But at some point in your investment process, you will make a loss. How do you decide or how do you bounce back from a run of losses? Because let's face it, we've all been around a long time and I've been through periods where I've taken a sequence of losses and I'm sure you've been the same. Do you ever feel tempted when you've hit that sequence of losses to tweak your investment process? How do you stop that from affecting your confidence in the process?
Mouhammed: Yeah, it's a very important question as an investor is that you, one of the most important things that you have to accept if you're entering this. Whether it's as a career or something that you want to do, is you have to recognize that you're going to get it wrong and you're going to get it wrong quite a lot. So humility is key here in terms of recognizing that. There are a number of things that you could do, obviously a post-mortem of why did the investment decision go wrong. So you can take those learnings with you for the next trade. But another approach is a pre-mortem. To answer your question is to say, if this happens, this is what I will do. So there's a lot of contingency planning and actually doing scenario analysis of if I get this decision wrong, then this is how I'm going to react. Deciding that before it happens is key because you're addressing a human characteristic and the time of the loss. There've been difficult periods, you know, I've been investing for many years and there've been periods where we've seen some of our investments not deliver. And you have to ask yourself at those times, is it something that was wrong in the process or is it something that we didn't follow that the process told us? And it's always one of the two things is you either didn't follow the process or the process needs improvement and that's something that brings you back to improving the process and ideally following it all the time.
Michael: So that's something that resonates quite strongly with me because in terms of planning a trade, not only do I look at the downside and there is a mindset that you look at the downside without really properly looking at the potential upside. So what's my potential profit? What's my potential outcome, positive wise for this trade? And you obviously look at that and you think that's important?
Mouhammed: Yeah. Yeah. It's essentially, plan for the worst and hope for the best right. Essentially you're always looking at that downside. What's your margin of safety? How much could you withstand if you're wrong. And you know, the upside is the nice thing to have, you know, that's essentially where you're thinking, at least I know if I'm wrong, this is how much I could stand to lose. But the upside will be the bonus that you get if you're hopefully not wrong.
Michael: And what is the risk-reward ratio in terms of that? For every 10% of risk you're potentially looking to make 20 or 30 or 40% on the upside? Is it that simple or is it slightly more complicated than that?
Mouhammed: I don't think it's that simple. I don't think it's numerically that simple. It's that essentially, as I mentioned, the biggest risk that you run as an investor is the risk of losing money. And that is at its highest when you overpay for something. And so a simple way you can look at an asset and you say if it's trading at 20 times, then you say, what is the lowest that it can go? Obviously zero is always an option, but actually within the realms of the distribution, you say an asset like this has traded as low as whatever it might be, 10 or 5, or if it's an asset that's a reasonably new asset, you look at comparisons, you quickly gauge the downside if things are really wrong. And that will vary by my investment. But that gives you a sense of the downside.
Michael: So you talked about when things go wrong. From my perspective, when things go wrong, obviously I look at the process, but I also think about maybe stepping away for a little bit to try and clear my head. Because sometimes there's a perception that maybe you're too close to it and you need to take a more aerial view of the process to try and determine what's gone wrong?
Mouhammed: Yeah. I guess it's like perspective is quite important. I draw an analogy from say sport. If you want to become a very successful runner, it doesn't mean that you need to run from 6:00 AM till 6:00 PM every day for seven days a week and then you'll be a phenomenal runner. Actually, there's a lot of merit in taking breaks, a lot of merit in actually doing other things other than running. And it's the same with investing. Sometimes when you're hitting a tough patch, actually stepping away and doing other things to give you that perspective is very rewarding. And that could be doing other things, being with family, being with friends doing extracurricular activities and working with the community and so on. These are all things that just give you that perspective so when you do come back to the discipline of investing, you come back rejuvenated and ready to tackle it with a fresh head. And so yeah, I'm a big fan of that and I would highly encourage anybody that wants to pursue either a career in investing or obviously invest for their own personal wealth to build that into their process. We should add that to VAMOS somewhere, you know, last R for rest.
Michael: Or work-life balance?
Mouhammed: Yeah. It's definitely a part of a work-life balance, but it's also just maximizing your ability to do well at the thing that you want to do. And I think getting that work-life balance, does help you.
Michael: And clear your head?
Michael: Because I think sometimes we're all guilty of it. We get too close and we can't see the wood for the trees and sometimes walking away, sleeping on it and coming back in, coming back with a fresh pair of eyes sometimes helps?
Mouhammed: Yeah. And I think that especially in any activity that requires decision making, tough decision making we have to recognize that if you overwork the brain, it then becomes irrational, it becomes tired, it becomes weak. That's scientifically proven. That's intuitive. So building in time for perspective, for rest, for context of why you're doing what you're doing is key to helping you do it better.
Michael: And build confidence?
Michael: Well, I think that's it. Many thanks Mouhammed. Really appreciate you taking time out of your day.
Mouhammed: It's a pleasure.
Michael: And hopefully our investors and our clients will take an awful lot of your thoughts away and as a result, improve their trading.
Mouhammed: Yeah, thank you for inviting me to be on this podcast, an absolute pleasure to have the conversation.
Michael: That was Mouhammed Choukeir joining us in London at the office of CMC markets UK. I'm Michael Hewson and thanks for listening. This is The Artful Trader.