Some good reads from around the Web.
Faithful Monevator readers (hello mum!) might have noticed we’ve been a little slow on articles over the past couple of weeks.
Like an evil genius whose wayward robot has lain waste to Manhattan, I can only point to ‘technical difficulties’.
The site gummed up last week, to the extent that it actually fell over on Monday. I’ve therefore spent a couple of days fiddling behind the scenes to fix your favourite blog about money and investing (or at least the only one to draw parallels between Star Wars and saving).
Having bored myself to tears with this technical faff, I won’t do the same to you by explaining how you’ll now benefit from a faster, more reliable Monevator.
I would ask you though to please point out any bugs you see, as doubtless I’ve forgotten some legacy issues. (On that note, I know a test post was emailed out yesterday. Apologies!)
My read of the week
You might fill the void we left in your recent reading schedule by ploughing through the latest letter from my favourite down-to-earth hedge fund manager, Jeremy Grantham (it’s a PDF).
His latest quarterly update to shareholders is sometimes a heavy-going read, but it’s worth persevering with for insights into stock market volatility and the money management business.
Grantham writes:
The central truth of the investment business is that investment behavior is driven by career risk
In the professional investment business we are all agents, managing other peoples’ money.
The prime directive, as Keynes knew so well, is first and last to keep your job. To do this, he explained that you must never, ever be wrong on your own. To prevent this calamity, professional investors pay ruthless attention to what other investors in general are doing.
The great majority “go with the flow,” either completely or partially. This creates herding, or momentum, which drives prices far above or far below fair price. There are many other inefficiencies in market pricing, but this is by far the largest.
It explains the discrepancy between a remarkably volatile stock market and a remarkably stable GDP growth, together with an equally stable growth in “fair value” for the stock market.
This difference is massive – two-thirds of the time annual GDP growth and annual change in the fair value of the market is within plus or minus a tiny 1% of its long-term trend.
While I’ve long admired Grantham’s writing, I don’t have any particular view on his funds. Passive investing in simple index-tracking portfolios will do the job for most of us.
Unlike certain Monevator readers, however, I am not so scathing about the insights offered by the better active fund managers – especially if, like me, you do a bit of stock picking yourself.
Many of these people are extremely smart. However they find it hard to get an edge on their equally smart competitors, and so after fees they fail to beat index trackers.
As Grantham explains, if fund management is your job then it’s better not to even try to be best, if it’s at the risk of being worse than average.
