Published by Kauders Portfolio Management, Authorised and regulated by the Financial Services Authority
... and here is our guide to financial services in the festive season. Return to home page of contrary view or return to complete index
Aladdin's Cave
Treasure galore! Everyone shall have a reward! Thus does the financial services industry promote its wares. Always, the big number, either promised yield, or past performance.
Their promotional material is aimed at the lowest common denominator. Glossy graphs from bottom left to top right, plus performance figures, sometimes even simulated figures, to convince the doubters.
Aladdin's Cave always has something for everyone. Want to buy something because it has gone down? Step this way, sir! Want to buy something that's going (ie. gone) up? It's right out in the front row. Fancy a Tibetan Internet Service Provider? Here's our dotty corner.
The genie's skill is in listening to what you want, then magically providing it. Of course, if you want to sell that dog that has only ever lost money for you, he will be happy to oblige. The next person in may fancy it.
Peter Pan
Aladdin stays in business for one simple reason. There are always people who think that things never change. Translated to financial services, means those who believe prices always go up, and if they go down you should buy some more, even if you have to borrow.
New people enter financial markets all the time, and they must learn the lessons afresh. Many never learn. The credit bubble has delivered a one way ticket to people who should never, ever, go near markets. In a thoughtful piece before the "dot com" bubble burst, the Financial Times observed that the Internet share craze was likely to result in a significant transfer of wealth from the shires to City pockets. The Financial Times thought that losses would be inevitable, and only the promoters would make money. You know what happened.
Little Red Riding Hood
Give me free advice! cried Little Red Riding Hood. The big, bad wolf obliged: his Christmas feast was carefully planned.
If chasing performance is cardinal sin number one, then expecting free advice must be close behind. Despite all the efforts of public-spirited pundits to educate people, paying for financial advice is still seen as undesirable. Commissions provide the meeting place for both parties: free advice that has to be paid for somehow, pitted against the salesman's desire for business. As a result, unrealistic promises based on past performance can devour innocent expectations that the past can continue indefinitely.
When you buy something intangible, human nature will emphasise the price (avoidance of) and performance (acquisition of). In direct selling of general insurance, people buy the cheapest, oblivious of restrictions that only become apparent when a claim arises.
Our way is to expect people to pay a fair price for the ability to project current incomes into the future, and for avoiding rookie mistakes in overtrading. No commissions, no conflicts of interest. This is all beyond Joe Public, who always falls for an easy answer with no visible cost. Which is why Joe Public gets eaten by the wolf.
Babes in the Wood
In the long run, the average race course punter loses money. Bookies' earnings come from the collective pockets of all punters. In an amusing essay on irrationality last Christmas, The Economist pointed out that racegoers shift their bets towards long-shots as the day progresses, in the belief that a big win will compensate for the steady attrition of losses (15th December 1999).
The race course epitomises the gambler's secret urge to lose, which is understood by professional psychologists as well as the bookie fraternity. Capital markets are the same; just look at one single number at the bottom of the page. Is it bigger than when you last looked at it a month, or perhaps three months, previously? Such over-simplification fails to understand the nature of risk and prohibits slow, steady accumulation of income. In an era of instant gratification, the single number suits the majority, just like the impossibility of winning at the race course suits the racegoer.
After a long bull market, most people feel that prices are a one way ticket. The belief that the gamble will always pay off is uppermost in the consciousness. In fact, after a long bull market, there are progressively fewer individuals left to be converted into belief in eternal riches, which is why the trend has to end. The presence of the innocent babes tells you the end game is fast approaching.
Sleeping Beauty
Luckily, there is an alternative. We have spent the past dozen years spelling it out: Gilts and US Treasury Bonds. As a result, our Clients are still receiving good yields and have made capital gains. Interest rates and share prices going down together, in exactly the same way they have done in Japan, will prove the merit of investing in the highest quality Government securities.
We have already examined the reasons why people have failed to project the income yields of the past into the present. The desire to buy easy answers, in the shape of past performance, will continue to deny many the ability to hold on to both income and their capital base. In a few weeks, you will see the annual elaborate ritual for convincing the public they should keep gambling: the Gilt-Equity study. This piece of annual year-on-year comparisons is heavily distorted by the great post war inflation. That inflation is OVER. It is OBSOLETE. If you choose to buy past statistics incorporating it, you are bound to be wrong. Hopefully, some thoughtful pundits will make this point a little more forcibly this year.
Sleeping Beauty is there, but you have to make the effort to find her.
Dick Whittington
In a gold rush, most of the big money is made by those who sell the shovels. As we remarked earlier, the Internet craze is more likely to line the pockets of the promoters rather than the prospectors. If two groups of researchers can disagree so fundamentally about long term statistics, what chance does the average investor have of separating truth from fiction?
A maddening thing about financial services is that facts can be made to fit any case. Recently we were told that equities go up because lack of inflation means that interest rates can stay low. Not many years ago, received wisdom was that equities went up to compensate for inflation. The story has changed to suit events. Some people call this flexibility; we call it hoodwinking.
When share prices are high and every punter wants to try his luck, the supply of execution-only stockbrokers expands to meet the demand. Of course, when the bear market comes round, that demand shrinks. Quite a lot of organisations now dabbling in financial services will turn again once demand for their services disappears.
Mother Goose
Mother Goose runs her own very special pantomime. She sets the rules for the pantomime audience. Which seats can you buy? How much can they be sold for? What disclaimers must appear in the programme? (Sample: "Pantomime goers may experience tears as well as laughter, and may go out of the theatre with less than when they came in").
Even if you do not need Mother Goose's warnings, you must still pay for her. She isn't optional. Indeed, she is so forward looking that she sets rules for the pantomimes in Euros, even though you pay in sterling. If you do not like the rules, she can quietly suggest you may be misbuying. Maybe you should try tragedy instead?
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