The best investment decisions are almost always those that feel most uncomfortable at the time they are made. George Soros says he gets terrible backache when running his biggest positions. ‘If it ain’t hurting, it ain’t working’ is a good motto to put on your computer screen. Those who think Japan is an excellent home for their money at the moment (as I do) are very familiar with this phenomenon.
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.
Aim — originally the Alternative Investment Market — is a curious entity that understandably excites conflicting responses. Since its launch in 1995, London’s ‘junior’ market has raised some £24 billion in new capital for smaller companies. But more than 70 per cent of companies listed on this relatively laissez-faire exchange have failed to make money for investors. A huge number have disappeared: the best taken over or promoted to the main market; many more simply insolvent; some spectacularly fraudulent. The official Aim index, which tracks the performance of its 1,100 constituent members, remains 27 per cent lower today than it was when Aim opened two decades ago — and it excludes companies that have gone south in the intervening years. Yet, paradoxically, Aim has also been a resounding success.
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.
There is a long and interesting profile of Janet Yellen, the head of the Federal Reserve, in the latest issue of the New Yorker. As