Mark Jones: Sell! Sell! Sell!
That's the roar from the ranks of panicking financial market traders,
caught
up in the madness of the crowd. But they would be better off stepping
outside the herd, taking a leaf out of Ronan Keating's songbook, and
saying
'nothing at all'
Independent on Sunday
Sunday, 23 March 2008
If personal happiness is all about being in control, then we live in very
unhappy times. Anyone whose prosperity and livelihood is locked up in the
money markets watches helplessly as those markets plunge and bounce and
our
nest eggs are flung around in the chaos. Even if our money is not invested
in equities, we can't help but feel the market will get us in the end.
Budgets will freeze, consumer spending will dry up. At work you suddenly
see
the HR chief around a lot and the finance director is urgently searching
for
that book on downsizing he hasn't looked at since the early Nineties.
It's a bad, bad feeling. Remember how we felt when we read about that
Devon
couple who came back from holiday to find that their lovely house had been
trashed by a party of gatecra****ng teenagers? We are that couple, and that
is what's happening to our money: it has been taken over by teenagers. The
market is a creature of hormones and wild mood swings, destructive,
euphoric, depressive. One day it's going baseball cap in hand to the
central
banks and moaning that it's not fair that it has a hangover and broke a
bank
or two. The next it seems plain evil, spreading false rumours, destroying
institutions and people for the hell of it.
As for the banks and the finance ministers, they are like ultra-liberal
parents who are suddenly asked to enforce some discipline. There's little
they can do but spend lots of money clearing up the mess.
The teenager analogy isn't original. It comes up a lot at times like
these.
So does the tendency to anthropomorphise and psychoanalyse the market.
When
profits are strong, house prices buoyant and the FTSE never makes the
front
page, investing is a stable science. We consult league tables, examine
risk
indices, trust the computer models. When the bad times come we start
seeing
the financial world in cartoon terms.
So what can you do to evict the teenagers from your house and wrest
control
again? Like many people, I'm an averagely stupid investor who is now more
than averagely confused and uncertain about what to do. I listened to last
week's re****ts and kicked myself that I didn't see the various rallies
coming; then kicked myself I didn't get out when the going was bad.
Of all the re****ts, one stuck with me. On Radio 4, the BBC's economics
editor, Evan Davis, who sounded audibly tired of trying to explain and
second-guess what turn the credit crunch would take next, began talking
instead about market movements in behavioural terms. His thrust was this.
In
good times, traders' optimism is easily fuelled: they are listening out
for
data that will sup****t their decision to pile into those shares or sup****t
that flotation or rights issue. Bubbles and booms are the consequence.
When
bulls turn to bears, they suddenly see the world in shades of blue and
only
hear music in the minor key. The people making decisions on investments
are
tuned in exclusively to the bad news channel. Sentiment and psychology are
more im****tant than stats.
I thought about this let's call it the subjective fallacy. You get the
same phenomenon in politics. In his early days of his premier****p, Gordon
Brown could comment on the weather and it would seem like the wisest, most
trustworthy meteorological analysis you'd ever heard. Today, you'd go
scurrying for an umbrella if he told you the sun was ****ning in a
heatwave.
Spin-doctors say we listen to the communicator, not the communication. Our
truth is subjective.
So what do we trust: psychology or economics? In its early days, the
latter
was a branch of the humanities. Adam Smith's first major work was not The
Wealth of Nations but The Theory of Moral Sentiments. One of the Victorian
era's most influential work on economics was written by a Scottish
songwriter and poet called Charles Mackay. His Extraordinary Popular
Delusions and the Madness of Crowds sought to explain the reasons for the
South Sea Bubble and Dutch tulip mania; it is still cited by investors
today.
Yet in the century that followed, economics became redefined as a science
as
the statisticians and model-theorists took the high ground: until 2002
when
something strange and rather unexpected happened. The Nobel Prize for
Economics went to a writer who had never studied the subject. Daniel
Kahneman was a research psychologist and his studies showed (this is a
crude
summary) how humans make errors when they think they are being at their
most
analytical and objective.
Here's a typical Kahneman experiment. He asked an audience to give him the
last four digits of their social security numbers, then estimate the
number
of physicians in New York. The two sets of numbers had nothing to do with
each other, of course; yet the correlation between the answers people gave
was well beyond what might be expected by chance. The process is known as
anchoring. We are highly influenced by the numbers and facts we're given,
even if they are guesswork or wildly inaccurate. So we could all have a
bet
on the number of runs England are going to score in the second innings of
the current test match. I'll go first and say 420. You might think that
number is ridiculously high based on what you know about the England team
and the record of teams batting last. Yet the chances are you will err on
the high side when you make your own estimates; I've influenced you.
Alistair Darling's growth forecasts set out in the Budget were widely
criticised for exceeding the City's most optimistic figures. Perhaps
Darling
will be proved right in time and we should then praise him for not falling
victim to anchoring. (Alternatively, he is just being a cynical politician
bending the numbers to make us believe everything is going to be all
right).
So back to the matter of feeling in control. Here's how some investors do
it. They are called contrarians; they exploit the foibles and group-think
of
the supposedly objective analysts, economists and company managers. Their
unofficial leader is David Dreman, investment house owner and a columnist
in
Forbes magazine. The contrarians trace their lineage back to Mackay and
are
often known for their pessimism they are "perma-bears", sellers rather
than buyers. But they are just as likely to be very busy snapping up
stocks
in times like these. They seek out otherwise sound companies who are just
in
the wrong sector at the wrong time; or less sound companies whose
prospects
are not quite as bleak as the herd thinks. One Wall Street group which
specialises in the field calls itself "the Dogs of the Dow". A leading
British exponent of the behavioural finance school puts it like this: "I
buy
other people's anxiety."
So you should buy, not sell. Fine if you're Warren Buffett (who many think
of as the most successful contrarian of the lot); or if, as a City friend
puts it, "you've got balls of steel". But we are not all the richest man
in
the world and our cojones are made of flesh and blood. If the market keeps
on falling, banks keep imploding, you can't help but think the rational
thing to do is bail out. After all, people who bought stocks before the
Wall
Street Crash would have waited until the 1950s for their investments to
return to par.
The behavioural finance experts have one last piece of advice. Take it
easy
this weekend. Enjoy the spring. Forget about the stock market. Don't
listen
to your broker, listen to Ronan Keating. Ronan may not have been thinking
about long-term investment stratagems when he crooned, "You say it best
when
you say nothing at all"; but the advice could be very useful all the same.
Jonathan Harbottle, marketing director of Liontrust, a fund management
company specialising in behavioural finance, puts it like this: "Market
timing is a mug's game. Two-thirds of people who think they can spot the
bottom of the market get it wrong. Long term, investing in equities is
proven to be the route to real wealth."
Harbottle makes a further argument for inactivity, also beloved by the
Dogs
of the Dow and their friends, which goes like this. While you're waiting
for
your rubbish shares to recover, they are paying you for the privilege.
Dividends are calculated on the share prices; the share price is low you
get a better dividend. So sit tight.
That may just be the hardest thing of all. James Montier of Société
Générale, who has been described as "one of the truly great minds on the
psychology of investing", uses the example of a goalkeeper facing a
penalty.
The ball goes down the middle 28.7 per cent of the time (apparently). But
goalies always dive left or right. Montier believes it's because we feel
better more in control if we're seen to be doing something. You could
take the analogy further. Investment experts, like goalkeepers, trust in
their ability to read what's going to happen which way the market/ball
is
going to go. But they don't know; the stats don't change.
So as an averagely stupid investor, I'm plumping for inactivity. After
all,
isn't that the best way to treat teenagers? Ignore them. They're only
after
your attention.
http://www.independent.co.uk/opinion/commentators/mark-jones-sell-sell-sell-
799525.html
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