When promoting investments into equities one usually starts with a graph that demonstrates the superior performance of US (but not Japanese) equities in comparison with bonds during the last century. From that it is automatically assumed that the best way for long term saving is to invest in stock indexes.
Thousands of investors have built their investment strategies on abovementioned logic for decades and it has certainly influenced the financial markets. The popularity of stocks that are included into stock indexes has made them more expensive compared with smaller company shares and also the risk premium compared with bonds has decreased.
We believe that investing into stock indexes may not be as profitable in the future as it was in the past. It is traditionally assumed that the historical return of stocks can be used for predicting future performance but this assumption may be wrong. In every sphere of life the competition erodes profit margins and the same may well hold for financial markets. As more and more people have discovered stock indexes it is likely that it has made the future returns of those indexes smaller.
We strongly believe that there should be a reason for every single instrument in the portfolio and we never invest in instruments simply because one or another instrument is included into index. Our portfolios try to exploit the following opportunities:
Situations where companies are fundamentally undervalued because they are too small for big institutional investors, which are not included into popular indexes and are not covered by analysts of leading investment banks;
Situations where we find unjustified correlations between different instruments;
Investment strategies based on the macroeconomic vision.