“I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will”. That was one of the first epigrams from Warren Buffett that caught my attention twenty years ago when I was researching a thesis on the Sage of Omaha’s stockpicking methods at MIT. What belatedly dawned on me the other day was that something similar might just as easily these days be said about the fund management business: “Try to buy a fund whose investment style is so simple that your kid’s computer could run it. Because sooner or later, one will”.
Market watchers have reason to be disappointed by last week’s news that Intrade, a popular online betting exchange, is to close the accounts of all its US-based customers. The announcement follows a decision by the Commodity Futures Trading Commission to file a complaint against the company which runs the site, alleging that it has illegally been operating an unregulated options market. Non-US citizens can however continue to use the site, which offers punters the chance to place bets on a variety of political and economic outcomes.
In a complex and inter-related financial world, when so much information is flying across wires, fibre optic cables and satellite channels on a daily basis, the need to rely on heuristics – simple rules that govern your responses to the majority of everyday situations – is becoming ever greater. It is just as well then that research across a range of social sciences continues to provide regular confirmation of how powerful and effective such simple rules can be.
“Thinking, fast and slow” by the Nobel prize-winning psychologist Daniel Kahneman continues to ride high in the business book bestseller lists. I dare say therefore that copies have found their way into the hands of managers of investment firms. But how many of them, I wonder, have reflected on the implications for the businesses in which they are involved – and how many, alternatively, have quietly binned the book as too disturbing to risk leaving lying around the office?
The place to look for investment bargains, said the fund manager Sir John Templeton, is not where the news is good, but where it is really bad. Today that means looking for advantage amid the volatility and extreme valuations which the crisis in the embattled eurozone has brought in its wake. The strikes and riots that are spreading across southern Europe are exactly the kind of scary scenario in which investors with ice-cold blood in their veins, as one admirer once described Templeton, have historically been able to profit.
The damning money-weighted rates of return analysis carried out by Simon Lack in his book The Hedge Fund Mirage has prompted a useful debate about the true returns recorded by hedge funds. Industry lobbyists have not had much luck in undermining his critique, which is hardly surprising as the data, interpreted correctly, is essentially unanswerable (the conclusions you draw from the data is another matter).