Investment for dummies

There are very few things I’d claim to know more than most about. This rather limits – to put it mildly – the range of possible responses to this recent Daily Prompt:

“Take a complicated subject you know more about than most people, and explain it to a friend who knows nothing about it at all.”

But it’s been a while since my last post, and I like to think that my literally several avid followers are pining for another fleeting episode of mildly amusing sardonic observation, so I ran through the options.

It didn’t take long.

Stacking a diswasher? Complicated certainly, but not something my imaginary friend is going to care much about. The offside rule? Ditto. Plato’s dialogues? Forgotten. Need I go on?

Then it struck me: my former profession of investment management is certainly a subject I know more about than most people and, thanks to the media-generated mystique that surrounds it, is of some general interest.

Anyway, here are some important basic facts about the art of investment management:

You don’t even have to make a profit to be considered succesful at it.

There are many different styles of investment management. The most difficult of these is called ‘Absolute Returns’ and what makes it hard is that you actually have to end up with more money than you started with (a bit like ‘The Antiques Road Trip’, except the profits don’t go to charity. That would be silly.).

Not surprisingly, this style also offers the greatest potential for personal reward but, as it also probably entails working for a Hedge Fund, statistically you are highly likely to be an arrogant and obnoxious individual, which is a lifestyle choice you may want to think about carefully before committing to.

‘Relative Returns’ is much more common and a lot easier. The aim here is to do better than (‘outperform’) the market as a whole. Which is another way of saying that success comes from being slightly less inept than your competitors. Given that – as you will discover very quickly – most of your peers are utter incompetents, this isn’t as hard as it sounds.

The most common of all investment styles is ‘Index Tracking’. The idea here is just to do whatever the market does. Slavishly and unthinkingly. You don’t need to be terribly bright to follow this career path, since it’s all computerized anyway, but if you have an iota of self-respect it’s probably best avoided.

The market is never wrong.

Assuming you’ve done the sensible thing and chosen Relative Returns, you have committed yourself to try and outperform the market. The onus is on you to do that. On the rare occasions I would have a conversation with a broker, it would be rapidly terminated if he said anything to the effect that ‘I think the market’s got this one wrong’. It hasn’t. He has.

Blaming the market for your mistakes is about as sensible – and effective – as crashing your car and blaming the collision on a stationary vehicle coming in the opposite direction.

Avoid any emotional involvement with the companies you invest in.

There’s a Monty Python sketch about a TV show called ‘Blackmail’, which includes the classic line “we don’t morally censure, we just want the money”. This should be your investment mantra.

The worst thing you can possibly do as a professional investor is to fall in love with the companies whose shares you are buying. Given that I was dealing with banks, avoiding this error was probably comparatively easy for me.

However, if you do fall prey to this particularly unhelpful aspect of human psychology, you will become indulgent of their foibles and commit the cardinal sin of ‘confirmation bias’ whereby, whatever a company does, however egregiously stupid (yes, looking at you Fred Goodwin) you will attempt to put a positive spin on it. That’s the job of their Investor Relations Department, who may buy you lunch and pretend to be your chums, but are never your friends.

Talk the talk.

A great part of the mystique surrounding investment management derives from its industry-specific vocabulary. Remember that it’s this mystique that helps to support the unjusifiably high financial rewards on offer (although here again, there’s no point in criticising the market).

You will hear lots of jargon being bandied about in the interminable meetings that you will be required to attend (nothing comes for free in this business). Don’t hesitate to spout stuff like ‘tracking error’ and ‘Sharpe Ratio’. It sounds good and don’t worry if you have no idea what any of it means. Neither does anybody else.

Walk the walk.

By far the hardest thing about investment management is getting into it in the first place. Sorry, I can’t help you there. But if you are lucky enough to find yourself in this enviable profession, there’s every chance you can carve out a remunerative career without having to be anything exceptional. Well, I did it, so anything’s possible.

Once you’re in, keep your head down, follow the simple rules I’ve outlined here and, above all, try to live by the advice given to actors hoping to get a long run in a TV soap:

“Remember your lines and don’t bump into the scenery”.

 

 

 

 

 

 

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