Tommi Kemppainen
I became interested in the stock markets at the end of the 1980s. The first 5,000 pages of economic texts that I read were the miscellaneous material I was able to find at my local library. Later, studying for the matriculation examination was a secondary priority because I felt that I should read through the material for the entrance exams at Hanken and Helsinki School of Economics in order to figure out which school would give me better chances to get a job in the markets.
Studies at Hanken gave me a solid platform, and the first semester felt as if I was given secret information, so useful it was. I didn’t spend too much time at university before graduation. This was because it was a habit of mine to read through the course material already before the course had begun. Alongside investing and finance books, I read other literature, such as strategy classics from Sun Tzu, Machiavelli, and Carl von Clausewitz. Strategy is the key.
During my studies, I had an opportunity to invest in stocks using the Telnet network provided by a bank. With the Telnet feed, I also updated lists of historical stock prices into a software that I had ordered by mail from America.
I started my career as a Sales Trader and became especially interested in specialised equities and the actual investing service offering itself. I understood that investing is so much more than only stocks and bonds. Often, the most interesting things can be found when one has to do a bit more work than usually. I found out that a wide range of services are called asset management or portfolio management, even though they may have huge differences between them as regards the investment knowledge and capabilities.
The market crash in my early youth in the late 80s and the hectic end of the 90s ending in the dot-com bubble in the early 2000s have all influenced the way I view the markets today. I believe that the essence of understanding the market is actually the fact that much of the dynamics or rules of the market are constant in time. But which ones dominate the outcome at each given time is what changes. The market is not only a massive amount of data but also a product of rules, and understanding the rules together with the data can give one a good enough idea of the state and nature of the market. In the end, from a huge number of rules, only a handful typically dominate at any one time.
Experience matters because there exists a lot of investing wisdom that cannot be written as a hypothesis that could be tested, proven to be right, and written as a theory. The definition of theory is so rigid that, for example, housing crashes or bond market crashes don’t occur frequently enough for theories linked to them to be reliably tested. My investment strategy is based on the wisdom that a true diversification will eventually offer a high return relative to risk. This occurs only when investments are diversified into stocks, bonds, real estate, insurance-linked securities, and alternative investments. Only time will tell how much excess return these uncorrelated (and less correlated) investments that improve buying power in recessions will generate. It cannot be tested accurately beforehand. True diversification has been used globally with successful results, for example with investments in U.S. Treasury bonds, gold, and the Swiss franc. This can be proven a posteriori, but is it the most efficient mode of diversification anymore? Understanding the importance of diversification and its mechanisms gives us an opportunity to improve diversification even though it might not be tested and written as a theory.
I barely have any resistance to change, which makes it easier to have an objective approach to changes in portfolio allocation. Excess returns can be achieved from many different kind of sources when one only learns to keep one’s eyes open. For example, the HCP Focus strategy’s stocks are mainly the kind of stocks that I had considered to be overvalued, just because I didn’t understand the companies’ 25-year trend. Similarly, the small cap companies in the HCP Quant strategy don’t allow large players to invest in them due to lack of liquidity, and only a few smaller investors have the knowhow that we do to perform an extensive fundamental analysis of several companies simultaneously. Cyclicality, which is the Achilles’ heel of HCP Quant and HCP Focus, is balanced by managing HCP Black so that it has enough uncorrelated investments like insurance-linked securities.
Finally, to achieve excess returns, my key role at HCP is to facilitate our team in a way that investing wisdom can develop inside the company. My long background and intensive approach to investing and its dynamics result in a mature understanding of the field. If a stock price is increasing in its domestic currency, it’s not worth much if people are losing their trust in the currency’s ability to maintain its purchasing power. A new headline about a natural disaster doesn’t increase the probability of the next natural disaster, but it most likely increases the return from carrying insurance risk in the future. Even the smallest return is valuable, especially if it is uncorrelated with the market, because it enables a safer investing in equities, which have the highest return potential. The most valuable asset of an investment professional is the freedom to work in peace and, for my part, I make sure that the best people in our team can do what they are best at in the market. The outcome of this way of working is a successful customer and, as a result, successful wealth management.
– Tommi Kemppainen