There is a good reason why we lack a definitive account of what characterises the end of bull markets, in the sense of a prescriptive set of conditions that must be met for such an outcome to be logically anticipated by investors. Such a set of rules would of course be self-fulfilling (and therefore worthless) if widely known and acted upon. Only with hindsight, when earnings and economic data are revised to accord with reality, do we typically discover for certain what should have told us the end was approaching. What we do know from historical precedent is that bull markets (a) tend to end with a whimper, not a bang and (b) are rarely triggered by specific causes that have been prominently highlighted for months in advance. Given their current dominance of the headlines, it seems unlikely therefore that either a new Greek crisis or a September interest rate rise from the Federal Reserve will be the trigger that abruptly brings the current bull market to an end.
If you accept that the primary interest of investors is to form objective judgements about the outcome of uncertain future events, then the forthcoming UK general election poses a particular challenge. This is set to be the hardest general election in living memory to predict. The range of possible outcomes for who forms the next government is unusually wide. Among other consequences, not one of the mainstream party leaders can be certain of still being in post by the autumn.
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.
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.
By using the emotive phrase “rigging the market” to describe the impact of high frequency trading on the stock markets, the author Michael Lewis has guaranteed himself both extensive publicity and enhanced sales for his new book Flash Boys. In addition, by casting his story in Manichean terms as a tale of one heroic outsider taking on the evil big boys of Wall Street, he risks courting the accusation that he is special pleading for one vested interest rather than taking a principled stand against wrongdoing in the interests of a more general truth.