What do you want the stock market to do for you? Make short-term speculative gains, or grow your wealth over a period of years? My answer would be: ideally both — but the wealth part is by far the more important of the two. The-question is: what can a wealth-seeking investor do to minimise the risk of losses along the way? Here’s one technique that might help.
According to professors Dimson, Marsh and Staunton, in the latest edition of their Global Investment Returns Yearbook, investors often do well out of investing in companies which operate in “sin industries” and in countries where corruption is most developed. Doing bad, in other words, can often mean doing good for investor returns. That set me wondering how scandal-riven banks might fit into this matrix. Is it fair to classify them as the market’s new sectoral “sinners”? Banks provide many valuable services to customers around the world, and in a capitalist system it is as yet not a crime to lose money, although losses on the scale incurred in the great financial crisis from stupidly risky lending practices – in some cases verging on the fraudulent as well as criminally incompetent – cannot be so lightly dismissed.
Travelling up to Edinburgh last week to test the waters ahead of this week’s referendum vote, I found myself kicking off my visit by calling in on the cannily named Library of Mistakes, a newly launched charitable venture that aspires to offer Scottish students of all ages the opportunity to learn from the mistakes of their forefathers. The library is the brainchild of the market historian and investment strategist Russell Napier and is funded by many of the great and the good of the so-called “financial mafia” in the Scottish capital.
My thanks to Tim du Toit, founder of EuroshareLab, an excellent Europe-wide stock screening service, for alerting me to this interesting and sensible academic perspective
Behavioural finance has taught us a lot about the sub-optimal fashion in which investors (professional and private alike) arrive at decisions. It is 35 years since Kahneman and Tversky first outlined their version of what was to become prospect theory, highlighting the high value which investors accord to loss aversion relative to commensurate gains. Since then the field of behavioural analysis has expanded massively, most excitingly in recent years by aligning itself to the findings of neuroscience, which can track how different parts of the brain react to different intellectual and emotional challenges.
This is the full write-up of my recent interview with Terry Smith, the founder of Fundsmith. A shorter version appeared in the November 1st issue