Home / Ernest Shackleton, Keith Miller and Denis Carroll

Profile by Patrick Liddy

“For scientific leadership give me Scott; for swift and efficient travel, Amundsen; but when you are in a hopeless situation, when there seems no way out, get down on your knees and pray for Shackleton”. Ernest Shackleton was a polar explorer, who along with his twenty seven men, survived for over a year on the ice-bound Antarctic seas. Here was a man who never left anyone behind and went to remarkable lengths to save those in his charge. This was a man who had a fine grasp of perspective and understood risk intimately, lives depended on it. Today we are a society of averages or perhaps just so conventional. We think today’s little nuisances are considered pressure, and this is sensible as there are not a lot of life and death decisions in our daily outlook. Through the ages we have lost our sense of perspective on this as well as other things. As Keith Miller, a war hero and Australia’s greatest cricketing all rounder, put it: “Pressure is a Messerschmitt up your arse at 20,000 feet, cricket is not.” That’s perspective.

Perspective, or the relation of parts to one another and to the whole, in a mental view, is extremely important in finance. A risk/return perspective is often sighted. Many groups have mushroomed around risk in investment. One of the groups getting it right is CheckRisk. CheckRisk made a bold call on Japan. I must admit I am quite a fan of Abenomics. Their, CheckRisk’s, prediction was that with the mix of quantitative easing (printing money), fiscal stimulation and structural reform there would be improvement in Japan, particularly in the short term. The medium term was one of concern, they reckoned, because if this “shock and awe” approach did not work, the market would condemn harshly. The fourth thing, Japan’s public debt, was one of the things they felt may wreck the medium term. This is because Japan’s public debt is expected to approach 240 per cent of GDP next year. Fair point but why can’t they just buy more of this debt through more quantitative easing? In for a penny in for a gazillion yen I say.

So far CheckRisk’s call has been spot on. The Nikkei has responded well, the graph below shows. The market is up by over 70 per cent in just six months. And the yen has fallen from ¥ 77 to the dollar to ¥101.8.

Figure one – Nikkei 225-share

Source: Thomson Reuters

This is helping exporters and has helped the stock market. Plus small time Japanese investors are back in the market. According to the Economist, even in the Tokyo red-light district – the price of a basic half “massage” have gone up for the first time since 1990. Their call on the medium term, well we shall wait and see. CheckRisk are advising caution and see how the debt scenario pans out.

To consider the risk, CheckRisk use a variety of tools in their analysis getting to both the macro and microeconomic reasons for behaviour of markets. These include –

1.Active Credit Monitoring of Financial Institutions:

2.Risk Tolerance Modelling:

A.Asset Liability Mix / Maximum Loss / Capital Adequacy

B.Early Warning Risk Systems:

i.Credit Default Swap Monitoring: ROC and Price Limits

ii.News

iii.Rating Agency Warningsa.Interbank Rates

Counterparty Risk analysis. This approach, incidentally, enabled CheckRisk to correctly forecast the drop in global markets including Japan, which occurred last week.

Added to this is their different way of thinking. Which is just as well, as the founder, Nick Bullman reckons that “pattern recognition will not help you find Black Swans”. This is because he states “pattern recognition is a function of human behaviour that MUST lead to a factual analysis to be of any use. If you ignore the facts you will run into your own Black Swan”. Black Swans by definition are hard to predict, but if you can predict them you can profit from them. But, using patterns is useless. Fair point, as every major meltdown I have been involved with, and there have been many, was a once in a thousand year occurrence. This makes my age biblical.

Pretty clever blokes at CheckRisk. Although Mr Bullman is a dour fellow, he is more than off-set by Partner and CEO of the global business Denis Carroll. Now for those that know Denis, and many do, you know he is neither a backward thinker nor gentle debater. Forthright, especially on the subject of Black Swans. Personal experience tells, he witnessed a black swan fly away with almost half his retirement nest egg during the GFC and he was not the only one. This is a man critical of group think. His advice “Think independently before taking risk matters to a group and allow others to do the same”. “Create a Risk System that is dynamic, broad, sceptical and also has a forward-looking focus. Identify Potential Risks early and monitor them using Rate of Change”.