Goldman Sachs executive speaks on investment management

On this past Wednesday, October 7th, DeBaun Auditorium was filled with a plethora of finance professionals and students all ready to listen attentively to the wise words of wisdom from an experienced Goldman Sachs executive. Sharmin Mossavar-Rahmani, the Chief Investment Officer (CIO) of Goldman’s Private Wealth Management Group, delivered the sixth lecture of the President’s Distinguished Lecture Series. This initiative is meant to bring renown professionals from a variety of industries, such as cyber-security to environmental science to finance, to Stevens as an opportunity for students to engage in present day developments in these fields.
Mrs. Mossavar-Rahmani, a graduate of Princeton and Stanford, first began working for Goldman Sachs as a partner in 1993. Before working at Goldman she was also the CIO for Fidelity Management Trust Company. Over the course of her career, she has authored two books and frequently publishes articles regarding the dilemmas of portfolio management. In her lecture, Mossavar-Rahmani highlighted four particular areas that encompass many of the issues commonly dealt with in investment strategy and management.
The first of the topics covered the difficulty in dealing with specific market data and signals. In many ways, the financial market can be compared to a ship at sea amid a storm. It is not always easy to see where the ship is headed and is often left with little to no sense of direction. One of the most significant issues in finance is deciding which data metrics one should focus on and factor into their investment strategy. The problem here is that no one investment strategy is omnipotent, and the same goes for data metrics. The assumptions made with that particular strategy or metric do not often take into account all kinds of changes that occur in the markets each year, month, and day. The result is a system geared to succeed under current market conditions, however those conditions can, and do, change without notice possibly resulting in significant losses to investors.
In many cases, these changes in economic conditions often coincide with something called market regime shifts. A simple example of this would be either a “bull” or a “bear” market, that is a market inclined with momentum to perform well or fail, respectively. Market regime shifts can be much more complex than this and can also include changes in regulations, governments and business structures. In a way, it is the culture of the economic system. Sharmin Mossavar-Rahmani highlighted the current state of affairs with Emerging Markets (EMs) and the change in their central bank policies. Up until the start of the 21st century, most EMs set currency pegs but have begun to drop that system in exchange for a floating rate system. This regime shift, in regards to EMs, is one of the more recent changes in global economic history that has begun to come into effect with currencies like the Brazilian real that has experienced significant depreciation. The risk and uncertainty posed by these shifts is a very real aspect of investment strategy. If left unaccounted for it can make the difference between a profitable portfolio and a failing business.
One of Mrs. Mossavar-Rahmani’s most notable quotes came during the third section of the lecture discussing certainty, uncertainty and risk, “[the] biggest issues we are grappling with right now are what we don’t know.” Very recently, word has echoed throughout the world that China’s economy has not been performing as well as their government has so declared. Around August 24th, 2015, markets worldwide took a right hook to the chin caused by the shock of the new levels of uncertainty in the Asian market. More and more investors are coming to believe that China’s financial statistics are innacurate and inflated, leading to indications that its growth rate might be dropping.
Caterpillar, the corporation responsible for the production of heavy construction equipment, suffered significant losses due to a slowing in Chinese demand. Nike, on the other hand, experienced a sharp increase in its stock price thanks to a large sales jump in China. Mossavar-Rahmani affirmed the fact that these two examples provide very different perspectives on the state of the Chinese economy and contribute to the hazy view of the road ahead.
In the last section of the lecture, Sharmin Mossavar-Rahmani switched gears to recognize an internal issue that is not always given its fair share of the spotlight, behavioral biases among investors. In 1951, Solomon Asch published several conformity experiments that studied the influence of social pressure on an individual. It was determined that in two thirds of the scenarios, the individual would agree with the group consensus, even if the group was wrong, given the issue at hand being an obvious fact. For the operation of investment committees, it is absolutely imperative to acknowledge these conformity biases. Particularly in cases where the opinion of a group overrides fact and leads to improper decision making even when the right solution or answer is known. Ultimately, Sharmin Mossavar-Rahmani rightfully shed light on a vital internal factor that is truly worthy of as much consideration as the external factors at play in the markets.
To end the lecture, a brief Q/A forum was opened and a few of the questions and responses have been summarized below:
Q. “Is there a role for Artificial Intelligence in investment strategy?”
A. Among the most practical implications of an AI in investment strategy would be pattern recognition. It would very much improve the field, potentially increasing efficiency and stability, however, like many of the models in place today, it must be continuously updated to meet current market conditions in order to succeed. This is most often the problem today with many models that make assumptions that are not revised.
Q. “How do you deal with non-quantitative risks?”
A. A factor cannot be dismissed solely on the notion that it cannot be quantified, therefore even those risks which cannot be measured must still be factored into an investment strategy. Notable examples are geopolitical issues. One cannot quantify the impact of something like the Iran nuclear deal on businesses and trade in the middle-east. Nevertheless, the agreement still impacts a great many businesses and must be considered when investing. At the same time, it is also misleading to assign numbers to these factors which cannot be measured, as it can lead to inaccurate conclusions.