Scones, Sherry And Foolish Market Practices
The Age
Saturday June 7, 2008
I USED to live in a sleepy commuter village on the border of Essex. I bought the 15th century thatched cottage in my yuppy days when my annual bonus could have funded the budget deficit.
I settled uncomfortably into the community, one in which they considered you an invader if your roots to the village didn't stretch at least into the last century. My roots stretched back to a transient sharemarket boom and a desire to exploit the property value potential of a Vicar of Dibley village positioned unwillingly on a rail line that shot you into London's Liverpool Street station.The cottage was called Glebeside Cottage and the potential was not in the property but in the position. If you demolished the cottage and put down a strip of tarmac, you would have access to the "glebe" field, a parcel of land given to a vicar in addition to his stipend. It was next to the vicarage and owned by the parish council. Unbeknown to me at the time of purchase, the council wanted to develop it into a few hundred townhouses that would make it the best-funded parish council since Babylon. At the same time, of course, it would invite enough invaders to the village to outnumber the local defence force and threaten 1986 years of village development.And so it was that the parish council, indeed the vicar himself, approached me to buy the cottage. As a heathen capitalist, my roots did not run deep and I agreed, subject to a vote by the parish council allowing the purchase. And so it was I got my first lesson in the passion you can invoke by attempting to take someone for a fool. The parish council meeting was attended by more than 300 people, an attendance not witnessed since the cake judging scandal of 1834. The parish council and I were tarred and feathered and it was only thanks to my BMW soft top that I escaped within an inch of my life as the scones and sherry glasses bounced off my departing M3 badge. No one likes to be taken for a fool and the most slothful of characters can be invigorated to greatness by the threat of it. So why are we not stirred to action by some of these foolish sharemarket practices?Using past performance as a guide to future performance. It is a central tenet of great swathes of financial theory, but it is a flawed assumption and is adopted not because it is right, but because, without that assumption, there is no structure or certainty. It is akin to our belief in God. Necessary for life but not actually or mathematically logical. If anything, it misleads us into the sometimes expensive illusion that there is some certainty.Judging fund managers on past performance. Truth is, if a fund manager tops the performance tables he must be taking more risk than those underperforming him. It is a sign that you should sell his fund, not buy it. And if he outperforms five years on the trot, who knows, maybe he's just that random guy in the normal distribution of random returns that threw heads five times on the trot and bundled up his luck in a glossy brochure. Who knows?Believing initial public offerings are money for nothing. Haven't you heard the golden rule of IPOs? If they are any good, you won't get offered them. If you get offered them, you don't want them. And there are many others. Like investing in a portfolio of 20 stocks for long-term returns when you could just buy an index. Like thinking declarations of interest make research independent again. Like using PEs without knowing where the E came from. Like not taking tax into consideration. Thinking there's science in short-term trading. Thinking private placements are above board. Thinking fund managers don't deserve their fees. I could go on, but the vicar's just popped over for scones and sherry. Marcus Padley is a stockbroker and the author of the daily sharemarket newsletter Marcus Today. For a free trial, go to www.marcustoday.com.au
© 2008 The Age