The fine line between adding value and adding nothing
As a broker, I get the odd email along these lines: "I have a mate who reckons that most of the movement in company share prices is driven by the companies and traders trying to manipulate the market by sending out incorrect signals to generate momentum in the wrong direction and provide them with an opportunity." Or this one: "I often read of some big company becoming a substantial shareholder in a particular company. Is this done because they want the voting power to obtain inside information?"
As a broker, I get the odd email along these lines: "I have a mate who reckons that most of the movement in company share prices is driven by the companies and traders trying to manipulate the market by sending out incorrect signals to generate momentum in the wrong direction and provide them with an opportunity." Or this one: "I often read of some big company becoming a substantial shareholder in a particular company. Is this done because they want the voting power to obtain inside information?"Or this: "Are you telling us to buy XYZ because you want to sell it?"Yes, that's right. The sharemarket is a colossal machiavellian plot designed to take from the poor and give to the rich. It's all a conspiracy and you fell for it. Moohahahaha.I do occasionally wonder whether there isn't some kind of supreme being that has us all brainwashed with an erroneous collective hysteria. There must be, because some of our financial theories are, despite universal acceptance and implementation, costing us money and I can't help thinking we are perpetuating these bunkum hypotheses not because they add value but because we need them.After all, as Captain Cook would say, discover any group of human beings, no matter how remote, and they will already have a god and a religion. It was not someone's idea, it is a human need, to huddle under an omnipotent being and a creed. To have all our biggest questions in life answered, not by logic but by a figurehead and his teachings.Net result, from religion to financial theory, our insecurity endows our ideas with vastly more trust and belief than they could ever mathematically possess or deserve. We have to occasionally stop and ask: "Are we doing it right?"It is too easy and, frankly, unintelligent to just plough on and not question accepted practice in any field. Especially in finance and especially in the current market when the theories aren't working and adding value requires something more than just saying "Buy".There are a number of investment theories that run a fine line between adding value and adding nothing.For instance:Set and forget. It took the GFC to teach us this is nothing but a lazy investor's excuse for doing nothing and a lazy adviser's catchphrase for buying you a product and then not giving you any advice while they continue to get paid. The fact it rhymes has made it all the more compelling.Diversification. Another lazy theory focused on hedging your ignorance rather than making you money. We need to make money, not dull our failure and, therefore, success by buying a lot of different things rather than a few good ones.Portfolio optimisation. The efficient frontier and the efficient market hypothesis. The more academic the theory, the less likely it is to work in practice. A lot of financial academia is used as a platform for fund managers to market themselves to the asset consultants who need the science to look smart when they tell the people with the money who to pick as a fund manager. But does any of it actually make anyone money?Compounding. Produces some great historic returns that dazzle us into buying products but only ever seems to work in theory and in hindsight, and it almost never happens to us. You know the one: "If you'd invested $1 in XYZ in 1961 it would now be worth blah blah blah." Well, we didn't, right, and the reason is it only works if you actually do it, and almost no one does. Who has so much money they never have to touch it, ever? Compounding is the pinnacle example of marketing over reality.Mean reversion. It went down so it must go up. Dazzling logic that worked really well on Babcock & Brown and ABC Learning.Average down. Buy stocks that are falling. Clever stuff.Dollar-cost averaging. Invest without caring when. Brilliant. Especially for the people getting your regular cheque.I could go on. Astonishingly enough, animals don't have religion. Stupidity, blind faith and insecurity are, it appears, higher brain functions.