Asset Management is almost akin to Voodoo and is just as credible


Most specializations end up developing their own language, for example immerse yourself into either the Medical or IT arena, and you soon find yourself swimming in a tide of weird terms that often befuddle the uninitiated.

Here now, just to entertain you, is a “translation” from the “Asset management” universe. It amused me, because I received a letter just like it a few weeks ago that tripped my “skeptic” bullshit alarm. These folks only tend  to send out letters when some huge screw up has happened, so regardless of what the letter says, you know in your heart of hearts its an “Oh Shit” moment, because they are most probably explaining why your pension fund has shrunk (with a rich sugar coat wrapping). Anyway, here now is the text and the translation …

We are currently experiencing exceptional market volatility (the stock market has fallen) and sentiment remains negative (we think it’s going to get worse). Given the headwinds facing global markets, it is likely that investor returns will undershoot expectations (your fund will carry on falling in value).

The market’s re-rating and stock downgrades do, however, present opportunities in portfolio construction. (Shares have fallen in price, and now we’re wondering which ones we should buy or sell.)

We have reduced our overweight position in financials. (We had bought lots of shares in banks thinking they were going to recover, but got it wrong.) We maintain a low conviction on domestic stocks but are long-term believers in fundamental value. (We are no better than you at guessing what’s going on in the UK market, but we have our fingers-crossed that things will get better.)

We believe investors will optimise returns through a properly diversified investment strategy. (We are just going to buy shares that mirror the movements of the FTSE 100, so we won’t do better or worse than anyone else and you can’t blame us if things go wrong.)

We believe that maintaining high levels of liquidity is essential. (We sold some of our really rubbish shares and have left the money in cash while we decide what to do.) We remain long-term believers in equity. (What else are we supposed to say? The stock market has been lousy for a decade now but we have to keep saying that it will pick up.)

Price/earnings ratios (P/Es) are currently attractive, both historically and on an absolute basis. (Actually no one knows for sure how much the “E” – the profits of a company – will be this year, so we don’t know if it’s attractive or not.) Ebitda and price-to-book valuation measures are also attractive. (No, we don’t really know what that means either, but it sounds good.)

In the coming months, we anticipate markets will continue to be dominated by top-down macro factors (no one has a clue what’s going on) but our focus on stock-picking will reward investors. (We will carry on putting bets on shares in the hope that some of our horses will come in.)

Finally, we would like to remind investors that a multi-strategy approach in a diversified portfolio will over the longer term generate superior returns. (See all of the above.)

Much as I might like to claim credit for the above, I can’t. It was written by Patrick Collinson, the money editor of the Guardian and also their personal finance editor. You can find a link to the original here.

OK some additional “skeptical” thoughts on this entire industry (Well, come on now, I’ve got to get the knife in myself after what they just did to my pension fund).

First, paying these clowns your money to invest in stocks is like paying someone to gamble for you, I simply do not understand why many of us do it (Yep, I’m just as guilty, so can I plead insanity?). And even more seriously, when they screw up, they still expect to claim their large fee. All they usually do is look around to see what their peers are doing and do the same.

If you have no clue what to do with your money, then perhaps consider a low-cost tracker fund instead of some high risk managed fund where, to be frank, they might as well have a couple of monkeys throwing darts at the index list, its just as good. [No, I’m not giving you financial advise here, I’m just expressing my opinion on an alternative option]

Here is an interesting study from 2004 in “The Journal of Behavioral Finance”, that illustrates that the professionals do no better than random chance at picking stocks …

In two studies, stock market professionals (Nj = 22, N2 = 21) and laypeople (Nj = 29, N2 = 34) provided thirty-day forecasts for twenty stocks and estimated the size of their own errors as well as their own and the other group’s mean errors. Both groups predicted that the errors made by professionals would be half the size of the errors made by laypeople. In reality, the errors of both groups were about the size predictedfor the laypeople. Participants also estimated their ability to pick the best performing stock from two options. Both groups proved to be overconfident. Professional predictions were only successful 40% of the time, a performance below what could be expected from chance alone. Self reports and correlations between forecasts and price movements suggested that the professionals based their predictions on specific information of the stocks without sufficient awareness of the unreliability of this information, while the laypeople used simple heuristics based on previous price movements.

Well, as least we can make the honest observation that even if what they are doing is akin to voodoo where you toss the chicken bones up in the air and use where they land to make investment decisions, some of them have indeed nurtured one very practical skill – creative writing.

Oh, one final thought … there is indeed a guaranteed way to make a small fortune on the stock market. How? you might wonder. Well, it is simple really, you just have to start with a large fortune.

Leave a Reply