Growing Pains

Updated: Aug 3

I remember feeling extremely honoured when I was invited four years ago to write this column. It seemed to me to be a great opportunity to share the lessons – many of them painful ones – I had learned during my 25 or so years as a fund manager, and in so doing help readers become better investors.

"What chance did he have of discovering a market inefficiency that had eluded the maths geniuses?"

However, given the readership of What Investment is, like that of many other magazines for the keen amateur investor – and indeed like me! - predominantly silver-haired, I’ve come to wonder how I can play my part in helping younger generations learn about investing.

My own earliest lesson took place on a Dover to Calais ferry when I was nine years old. Armed with 50p of pocket money, I attacked the slot machines and after a few minutes had increased my purse to £1.20. Excitedly, I rushed to show my parents my enlarged pile of 10p pieces. My father, knowing nothing would stop me returning to the machines, simply said he would be interested to see how much I had left when we got to Calais; it was, of course, nothing.

Now, losing 50p as a nine-year- old - £5 in today’s money – had little bearing on how I invested what money I had in my 20s. Of far greater import is the fact that the scope I had during those years to make bad investment decisions hardly compares with that available to today’s youth.

Bad habits in teenage years can become ingrained, and while there were undoubtedly one or two vices picked up at school that I carried over into my 20s and beyond, they did not pertain to investing.

For today’s teenagers, particularly those armed with credit cards, online gambling and fractional ‘investing’ websites have, to some extent, replaced smoking and alcohol. Such activities may well lead to bad investing habits becoming ingrained or, worse, addictions.

Recently, I had the pleasure of discussing the subject of investing with two 20-somethings. Both had a large portion of their small portfolios in bitcoin and other tier-2 cryptocurrencies, though neither were sitting on large profits, realised or otherwise. Additionally, one had written an investment decision-making algorithm, though he admitted it had “not been very successful”.

My negative medium- to long-term view on tier-2 cryptos like bitcoin is based on them having no intrinsic value, intrinsic value being that which justifies – supports – the price of something.

Equities’ intrinsic value relates to the capacity for groups of people – i.e. companies – to make things or provide services that people want and thereby sell them at a profit. Gold’s intrinsic value stems from its physical attractiveness, durability, and rarity. A banana’s on its taste and nutritional content.

Even a bet on a roulette wheel has an intrinsic value, albeit one that is always a few per cent lower than the bet’s price.

No matter how hard I tried, I could not get my two young conversationalists to understand the difference between price and value, and that in the case of their ‘investments’ this difference, a negative one, was many orders of magnitude in size.

As for the algorithm writer, I explained to him – again, to no avail - that he was effectively competing with the likes of Renaissance Technologies, a hedge fund staffed by rocket scientists who had the world’s largest privately owned super- computer at their disposal. What chance did he have of discovering a market inefficiency that had eluded the maths geniuses?

I resigned myself – as my father had in relation to my minor gambling obsession 45 years previously – to the fact that nothing I could say would change their minds; the algorithm was fine, it just “needed tweaking”.

Instead, I explained to them the fundamental attribution error, the entirely natural and evolutionarily rational tendency for humans to attribute their successes to skill and failures to bad luck. They understood that an unskilful investor with such a tendency would erroneously believe himself to be skilful.

I suggested that for them to avoid falling into this trap they might put in place a system for assessing their successes and failures on the same, preferably quantitative, basis. More importantly, they might also each commit to a change in investment policy should the results of said assessments indicate that one was necessary.

In return, I got a couple of shrugs. Perhaps I had achieved something!

Published in What Investment

The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.

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