There is an optical illusion known as The Spinning Dancer in which a female dancer continuously pirouettes. Some people will see the dancer spinning clockwise (with her left foot on the ground) while others will interpret her as spinning anti-clockwise (with her right foot on the ground). There are few who can “flip” the illusion in their mind, but what is most interesting is that most observers are not able to see it both ways, even after much time and concentration. This has nothing to do with intelligence or personality; it is merely that individuals interpret ambiguous images differently, yet with great certainty.
If our vision can trick us for such a simple image, who is to say that it will not similarly fool us when viewing the complex investment landscape?
Today we believe that there are a number of “spinning dancers” in the investment world – ambiguous data that can be interpreted in multiple ways. Are equities overvalued, or are valuations justified by low interest rates? Are bond yields on an inexorable march downwards or are they likely to reverse course? Is Europe making a slow recovery, or is it taking the path of Japan? Should we be more fearful of inflation or deflation? Are emerging markets doomed to suffer from weak global growth or will they instead drive growth going forward?
While none of these questions have clear answers, in our conversations with other investors we have observed that many have fixed views about the answers. Like observers of the Spinning Dancer, investors are not able to see the world in multiple ways. It is interesting to note that a majority of people see the Spinning Dancer as going clockwise. Today the majority of people see the world as free of the many risks that exist. Volatility remains low and investors are seemingly betting on positive outcomes.
We remain cautious in our outlook, knowing that we cannot, in fact, be certain about “which way the dancers are spinning.” Therefore, we are more reliant on our ability to select top fund managers than on our ability to interpret macro-economic data and geopolitical events. In other words, when it comes to asset allocation we prefer to remain well diversified and focus on picking those managers who we believe are poised to be the best in their respective category.