More than a decade writing about financial markets has left me with an unhappy conclusion: I have no idea what is going on.
I’m being dramatic. I have some notions.
So on my last day at this great paper before heading off to join another, allow me the indulgence of laying out some things I have gleaned from my spot as a privileged outsider in the marbled halls of high finance.
An initial caveat: obviously this is not going to be how to get rich from betting on the markets. But regular readers wouldn’t expect this anyway.
The way to wealth, or at least comfort, is by working hard and not spending more than you earn. (I can hear my parents guffawing at this, coming from me.)
What drives markets? Buying and selling. Supply and demand.
Mostly, though, it’s people. Fear and greed. Flawed individuals making decisions in an environment of high uncertainty.
I reckon the insight nearest to a universal theory of modern finance is Keynes’ analogy with a newspaper beauty contest.
The distasteful and thankfully long defunct game was to pick, from a line-up of women, who you thought was most attractive. If your choice recorded the most votes, then you were a winner and eligible to win a prize.
The great economist’s insight was that rather than simply choose the most attractive candidate, readers engage in higher level games. They try to figure out who others might believe beautiful, and then who others believe others believe is the most attractive, and so on.
The lesson: much investment is driven by expectations of what other investors think. Stories matter.
It’s why even in simple investment games where the valuation of the imagined stock can be known with exactness, participantsstillbid the imaginary asset way above its underlying value. I know it doesn’t make sense, but are you surprised?
This is also a large reason behind whyspeculative bubbleshappen. We all believe we will find a “greater fool” who will buy our overpriced asset, and that we will find just such a fool before the crash.
This last delusion – that we can time the market – springs from the cardinal sin of overconfidence.
Just as we are all “above-average” drivers, we (actually, it’s much more likely to be men) believe that we have what it takes to “beat the market“.
Just as we fall victim to our own overconfidence, so we tend to be overly impressed with somebody else (again, mostly a man) speaking with assuredness. Research shows we tend to overvalue how a message is presented versus the actual content.
It’s the reason that the senior finance types I have interviewed over the years have tended to be cut from the same cloth.
I’ll let Berkshire Hathaway’s Charlie Munger prosecute this particular line, in a recent lengthy interview withThe Wall Street Journal: “You take a big [business] bureaucracy and let the wheels of industry grind, the kind of people that come to the top, we know what they look like. They’re tall men and they’re the kind of men with reasonably high IQs, but not super-brilliant, who would have been elected head of a fraternity house. So that’s what rises, you know – what, 80 per cent of the time? And of course that’s not perfect.”
In a world where money managers and advisers are trying to sell you something in an environment of intense uncertainty around outcomes, it’s important not to get caught up in the unwarranted confidence of others who, at the end of the day, are trying to sell you something.
Speaking of money managers, we all know the average manager underperforms the index. Indeed, the survey data suggests the large majority trail the market. The takeaway is so simple: put your money in listed or unlisted index-tracking funds instead.
What is ‘normal’?
We do live in extraordinary times.
My career atThe Finbegan with a crash and has ended with … what?
If I had to think of one term that encapsulates the difficulties facing investors, economists, policymakers and politicians these days, it’s “normal”.
As in: what is now normal? Is an inflation-free world “normal”, or is the experience of the 1970s just around the corner? Should we get used to Western economies expanding at a plodding pace, or is a brace of new technologies about to supercharge productivity? Can we expect zero or even negative rates to be a feature of markets for decades?
I get the feel that despite all the talk, few of us have truly embraced the idea of a “new normal”. There is a nagging sense that the moment we do all capitulate, the tide will turn.
I do observe, however, that there is too much unproductive debt in the world, and that this is a consequence of the over-financialisation of advanced economies. Neither will be unwound for a long time, so maybe we should be getting used to sub-par growth.
Finally, it amazes me how the financial market is dominated by highly paid soothsayers.
They may be dressed in expensive suits and armed with advanced mathematics, but are today’s analysts and financial sector economists really that different from the robed druid dissecting a fish’s guts for a sign of what tomorrow will bring?
Every disclosure document comes with the disclaimer: past performance is no indicator of future performance.
I believe every markets prediction should come with a mandatory preamble: “The future is inherently unknowable, but here’s my best guess…”.
And with that, I wish you all the best.
So long, and thanks for all the clicks.