An economist's views on strategy horizons. The second in a series of three articles on our discussion with Abby Cohen, Partner and senior investment strategist at Goldman Sachs.
Ducere Global Faculty Member, Abby Cohen is an American economist and financial analyst on Wall Street. She serves as a partner and senior U.S. investment strategist at Goldman Sachs. As a Ducere Global Faculty Member, unique content with Abby Cohen is featured in the following MBA topic areas.
Strategic Decision Making
Technology and connectivity have increased the speed and reach with which business is conducted. Economies, industries and capital are not immune to the effects – which can at times lead to a distorted understanding of returns on investment and value creation. Managing capital and investments is a key element of strategy. Hence it is only prudent to maintain an adequate balance between short-, and mid- to long-term objectives. While public companies are beholden to demonstrating achievement of performance through common reporting mechanisms, the strategy they pursue is subject to economic and market forces that do not necessarily follow quarterly, or yearly cycles.
We asked Abby Cohen of Goldman Sachs to share her thoughts on the relevance of time-frames and research in developing investment strategies. This article provides Ms. Cohen’s thoughts developed over the course of her extensive practice which readers may use to broaden their views and deepen their understanding.
‘Investors with the longest horizon are corporations themselves. If they think there’s a good opportunity for an investment some place, they can’t just move in through the marketplace.It typically takes them many years once they’ve decided.’ Abby Cohen
Cohen on the importance of time-horizons in investing:
“One thing that we try to do very carefully here is to look constantly at conclusions we have reached, not because we want to change them, however. We want to come up with conclusions that are useful on the intermediate and long-term. We come up with a scenario that we think is most likely to play out and we’re always checking the data to see whether new facts support or perhaps hinder the conclusions that we’ve reached and we will adjust probabilities.”
Investment strategy is by necessity based on assumptions and projections that relate to the future, and hence by definition uncertain. The further out the time-horizon, the more likely it is changes will occur during the execution of that strategy. Resources industries for example may expect returns from new mines in a time-frame of 10 – 20 years. The commercialisation of research in pharmaceuticals may become viable after 5-7 years after starting a program. Thus it is essential to not only perform research prior to making an investment decision, but equally to continually monitor economic, market and industry data and trends. Equally, the quality of the data input is directly related to the veracity and continued validity of assumptions and projections, and strategy.
Cohen on the need for quality data and evidence based analysis:
“The focus in Goldman Sachs research is to emphasise the facts, not the opinions, the facts. And so we try to look at things as they are as opposed to the way we might like them to be. We’re always thinking about not just the questions our clients are asking right now, but the questions they will be asking or should be asking. We’re trying to make decisions and those decisions require not just fantastic technology to analyse the data, it also requires high quality data. If you’re using bad inputs, you’re going to get bad outputs regardless of how good the model is.”
Economies, markets, and industries form systems that demonstrate various forms of cause and effect. Viewing these through a single frame is insufficient – and risky.
“In the 1990s, there was a point where every economist said, ‘The good times will continue to roll. The economy is performing well’, but we were hearing entirely different information from the analysts who work with us. ‘Things are not looking so good. Orders are being cancelled. Inventories are going up’. We were able to come up with a conclusion that was out of the consensus, but turned out to be correct.”
In summary: Forming, and executing on an investment strategy requires a broad and comprehensive view of economies, markets and company. Investments are intended to deliver returns in the future, which by definition is uncertain. It only makes sense to gain as much insight as reasonably possible – not just initially, but continuously.
Abby Cohen is a leading economist, Partner and senior investment strategist at Goldman Sachs, and President of the Global Markets Institute. Ms Cohen serves on the White House-appointed Innovation Advisory Board for economic competitiveness, as a presidential councillor at Cornell University, and on the boards of the Weill Cornell Medical College, the Brookings Institution and The Economic Club of New York.