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Writer's picturePeter Elston

When the Fun Stops...

Updated: Aug 3, 2022

In my 20s I had a gambling problem. I’m talking about my early career in the 1990s at a major UK fund management house, and how by our mid-20s my contemporaries and I were making investment decisions in relation to clients’ hard-earned savings. We hadn’t a clue what we were doing.

"How can young people be helped to reach this epiphany sooner?"

Investing is generally considered to be fundamentally different to gambling, even though charts of stock prices and betting odds over time are indistinguishable. This arguably makes ill-founded investment decisions far more dangerous than a losing bet on the gee-gees.


Most bad investors are unlikely ever to understand that what they are doing is guaranteed to lose them money over time in relation to a passive equivalent and will remain victims of the fundamental attribution error whereby people tend to attribute successes to skill and failures to bad luck.


There is a paradox at the heart of investing. Passive investing is probably the best option for most people but by the time they realise that, they may already have made decisions that cost them a more comfortable retirement. How can young people be helped to reach this epiphany sooner? Certainly not with slogans like ‘When the fun stops, stop’.


The advent of fractional investing complicates things. There is little difference in appearance and function between fractional investing and gambling apps. The optimist might hope that young people would make the link between the two sooner and thus when they start putting money aside for their retirement would choose the safer – passive – option.


Pessimists, on the other hand, might argue that because young people are more susceptible to the fundamental attribution error, fractional investing means that an erroneous belief in one’s talents becomes more engrained at an earlier age, not less, and so is harder to shift.


I haven’t decided where I stand on this matter. What I do believe, however, is that because investment decisions throughout our lives are crucial, better investment education would be a good idea.


My own investment education consisted of an intensive one-month course laid on by the aforementioned fund management house that had employed me, followed by one year as a ‘graduate trainee’. We were taught about the ‘efficient market hypothesis’ as a quirky theoretical construct rather than as the stark reality, supported by real world evidence, that it is impossible for most to ‘beat the market’ – to do better than a passive equivalent.


After all, ‘the market’ comprises a countless number of participants and a ‘market price’ an average of – or balance between – their countless views. By taking a view – meaning that one believes the price is either cheap or expensive – one is saying that half of the participants are wrong, quite an arrogant thing to do.


Take inflation, for example. It has been falling around the world for over 40 years and having now reached very low levels, the big question is whether it will rise for the next few decades or stay low, perhaps even fall further.


Falling inflation in recent decades has been driven by a shift in production of manufactured goods from expensive developed countries to cheap emerging countries, as well as prudentialfiscal policy that has seen government debt-to-GDP ratios in advanced countries fall to low levels.


Inflation will now start to rise because first, the shift in production has taken place and labour in emerging markets is no longer cheap, and second, there is no longer a strong belief among policymakers that massive fiscal stimulus leads to higher inflation, something that both history and theory suggest there should be.


Falling inflation in recent decades has been driven by stagnating world population growth and accelerating technological advance. Inflation will continue to fall or at best remain low because a) population growth will continue to decline, and b) technological advance is, if anything, accelerating not decelerating.


Does one of these arguments sound obviously more convincing than the other? I don’t think so, but you be the judge.


I do not want to suggest that passive investing is for everyone. Some, whether professionals or amateurs, will have the knack to make good investment decisions on a consistent basis, and it would be foolish not to make use of it.


But it would be even more foolish to not recognise that one does not have it.


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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