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February 08, 2005
Funds of faith
There is perhaps nothing that better characterises the at once comical and lamentable blind adherence to anthropic intuition than the continued existence of fund managers in contemporary financial institutions. These people exemplify, if anything does, the proper target of any "anti-capitalist" gesture, insofar as it seeks to rid the world of illegitimate power and control, of the blind faith of the moneyed in the wisdom of the more-moneyed, and of the continued existence of corpulent priests guarding the gateway between cash-money and capital-money, and claiming a share by simple virtue of their talent at bluffing. Rather than capitalism "itself" being a source of corruption, it is discredited throwbacks such as these human agents that represent a failure to 'live up to' the conceptual torsion that the contemporary reign of hypercurrency insists upon. They symbolise our clinging to reasons (but not reason) and to the humans that generate those reasons for our comfort, in an arena where these reasons are at best, equal to shots in the dark. Those individuals who we used to call priests.
Imagine if you had a choice of two mathematical models which would be used to steer your investment for the next ten years. One had consistently grown at a steady rate, the other had wavered erratically, according to no particular pattern, but in general had yielded less than the first. Now, imagine that in the case of the latter, you were not given access to the actual rules of the model, except for in cryptic phrases that could not be interpreted in any systematic way. OK then, it's obvious which we would choose. Now imagine that the second, erratic, losing model is bipedal, with eyes and a booming voice. Oh, of course, you'd choose him.
A British building society sponsored a contest (as you will be aware, this is only one of many examples) where a group of teenage students made as much money as a professional fund manager lost, over the course of a year (+4.8 against -4.4%). Consider the staggeringly blithe arrogance with which the 'professional' dismisses this: "The students have benefited from a strict stop-loss strategy," said [ ] as a nod to the winners". Hmmm. Yes, stopping loss, that outlandish strategy, well, it could work, I suppose... As for his own choice of shares, he believes they are all solid selections hit by general market sluggishness". So what is he paid for, we wonder (if not to anticipate such sluggishness or to pick shares that will not be affected by it)?
The fortune of the fund manager's portfolio is a classic model of human error, a catalogue of 'hot picks' that turned sour, and reasoned 'value' investments made on the basis of 'knowledge' about the companies, which knowledge was obviously incomplete and so essentially useless. Whereas the students intuitively moved to a day-trading strategy, clipping profits from short-term movements in shares (a strategy that forms the basis of the high-risk high-profit derivatives market where traders accept there is little to 'know' about the hyperabstract options they are buying and selling - a market that is therefore considered somewhat less 'respectable' than the primary market in shares). The sponsor of the competition says "I honestly could not call their stock selections a well-grounded portfolio..Their strategy is more about avoiding disaster than long-term growth."
Thus the belief that human judgment embodies a sort of 'respectability' that has anything to offer above and beyond numerical trigger-mechanisms cashes out (or not) in the assumption that different strategies work over different chronological terms, and that wisdom does not trouble itself with short-term gains. But the sad fact for the professionals is that long-term, simple averages of the market (tracker funds) consistently outperform managed funds anyway, so they have no advantage there either. (Incidentally a tracker would actually have outperformed all participants in the contest). There simply does not seem to be any middle ground between massive-scale generalised expansion and an intensively-tended opportunism based on senseless micro-movements. The obvious background to this observation is the Efficient Market Hypotheses: that is, if there is anything to be known, then everyone will know it, and there will be no advantage in knowing it; or its converse, that there simply is nothing to know. All evidence suggests that the truth is distributed on extremely obscure and treacherous islands of order somewhere in-between these two extreme positions.
You have two choices: simply ride the long wave blindly, or plunge into the fathomless density of wavelets-within-wavelets without being worried about "knowing" what you're doing.
Either way, if reason was to prevail it would assure us analytically that reasons could not (that is to say that arguments from common-sense, empirical induction, or the interpretation of mathematically-undefinable qualities, could only be a hindrance, not a help).
Unless we take a different approach, from the side of the human, and treat investment not as a rational activity but as a sort of personality test or lifestyle choice. This would be a strong version of the conclusion John Allen Paulos came to about traders and their clients, that their decisions were often based on wanting to confirm (or recover) their own image of themselves rather than on hard-headed reason. In which case, as with all belief-systems, you get the results you deserve based on the congruence of your faith with the reality of the world you live in. And the lazy will always rely on priests to make their choices for them.
Posted by robin at February 8, 2005 10:36 AM