Human beings love complexity. There are more complex ways to put it, but as this post makes the case for simplicity let’s start as we mean to go on.

I argued recently that the stock market had fallen lately because it had gone up a lot, fast. We’d got carried away.

“What rot! I don’t subscribe to Monevator to read what my six-year old could tell me! I want to hear about sovereign debt defaults, plunging leading indicators, and a death cross price pattern!”

Okay, nobody wrote that to me but that’s how many people treat the market and economics. Just watch an hour of CNBC for proof.

Now I’m not here to say that markets or economies aren’t complicated. They are true complex systems.

What I do think though is that complex answers are more about fitting our idea of what’s a suitable class of explanation, rather than about being right.

In reality, the best answer to most stock market questions is: “I don’t know”.

Kids think complex

Our bias towards trusting complex solutions seems hardwired from birth.

I spent part of this week at Culture Evolves, a conference in London organised by The Royal Society. Anthropologists, sociologists, and various other –ologists discussed whether ideas and language evolve in a similar way to genes.

One session highlighted ‘over-imitation’ in children. The gist was that as kids we learn by imitating other people, but – unlike chimpanzees, notably – we’re sometimes prone to copying redundant activities, too.

Derek Lyons spoke about this research. It involves training four-year old kids to ignore witless adults, and then recording how the kids later extracted a prize from various toy-based puzzles:

Derek found that if just given the puzzle without adult guidance, the kids set about finding the quickest way to extract the prize.

However if kids first saw an adult doing dumb things like waving feathers, removing pointless struts, or tapping a box with a pencil before opening the door to the prize, the kids copied the redundant acts, too.

It seems that kids who first see an adult solve the puzzle are assuming the toys are more complex than they appear – that there must be hidden mechanisms that explain why these seemingly dumb actions are required:

• If researchers joined two toys together with a section of pipe and did dumb things on one before taking the prize from the other, the kids copied them.

• If the pipe was removed – disconnecting the two set-ups – the kids correctly assumed the adult was wasting time on the other toy, and went straight to the one with the prize.

Importantly, we continue to over-imitate as adults.

For example, if you don’t know anything about cars and you watch a mechanic check various parts of your engine before topping up your oil, there’s a good chance you’ll perform the same needless checks when you fix the oil yourself.

Similarly, if you’re an investor and you read or watch apparently informed market pundits, you’ll soon believe the FTSE fell by 0.2% because German government bonds are rising in reaction to saber-rattling in Iran, or similar nonsense.

Before you know it you’re trading noise like everyone else.

Dumb money is smart money

As investors, we should try not to assume that complicated products or explanations are always required, let alone superior.

Financial markets are complex systems. They are analysed by well-paid and clever-sounding adults who read charts, follow company results, and insist that investors should put 10% into palladium futures or Korean bonds.

Mostly we’d be better off ignoring them and sticking to a very simple plan. But it takes real understanding to appreciate that clean, cheap products in investing are usually better than expensive and complicated ones:

• I think new investors should just split their money between a drip-fed tracker fund and cash for five years. Financial advisers push for complexity to generate higher fees.

• Active funds are more popular than index trackers, even though trackers have been proved to outperform most managers. It’s hard to trust dumb tracking.

• Asset allocation is a very imprecise art. The easiest thing to do when you’re ready to move beyond the cash/tracker combo is to pick a simple ETF mix and rebalance annually. Complex financial models will suggest you need 3.653% of your money in this or that. You don’t.

• Complexity guarantees nothing. Many absolute return funds failed to deliver in the 2008 downturn, despite their complicated (and costly) strategies.

• Banks love to sell structured products because few customers understand how they work. (They’re actually based on derivatives).

Academics have even discovered that High Street savings accounts and mortgages are made deliberately more complicated to confuse us!

Takes one to know one

Perhaps you’re immune from favouring complexity, but I doubt it.

I’m financially literate, yet I still pick shares with a proportion of my portfolio. It increases the time dedicated to investing at least ten-fold, and the jury is still out on whether it will make me richer. The academic evidence says it won’t.

True, I claim I do it for fun. But there are other challenging things I could do for fun instead. I could become a cultural anthropologist, for instance, which on the evidence of the conference I attended is interesting and involves a lot more attractive women than share investing. (Give me a break – I’m recently single!)

In my experience, most people who get into the markets eventually buy some shares or active funds. Even if they know better.

K.I.S.S.

The real cardinal sin is to invest in something you don’t understand instead of a straightforward product that you do.

A great example are income investment trusts, which fluctuate with the stock market like any other shares, but have a very good track record of delivering a growing income over time.

People wary of the stock market shun these trusts, and instead buy expensive pseudo-bonds that deliver a crappy return and too frequently blow-up or result in a miss-selling scandal.

Other examples of over-complication include foreign currency mortgages, guaranteed equity bonds, and bundled life insurance products.

Shun them all, and keep it simple, smarty!

When I was a student, we called them McJobs. Undemanding gigs at a generic pizza place or in a bookstore where no one expected you to smile – not the customers, your employer, and certainly not yourself.

Everyone involved knew you were doing a McJob for the money – all £1.56 an hour of it – and as long as you didn’t vomit into a bin or miss three days in a row for Glastonbury, you’d hang on to it. If you didn’t, there’d be another McJob around the corner.

Yet 20 years on, the McJob is going the way of free student grants, teenage rebellion, and the thrill of finding your dads’ porn stashed behind the tubs of Turtle Wax in the garage.

We’ll miss it when it’s gone.

Faster, stronger, more productive

It’s the competition, you see.

In the globalised, inter-connected, bullshit-fuelled modern world, it’s no longer possible for bright kids to take a multi-year breather, unless it’s for something officially sanctioned like a gap year (deemed improving, despite everyone knowing gap years are Club 18-30 for middle-class kids with a few National Geographic photo opportunities thrown to please Gran).

Due to the intense competition foisted by continual tests in school, ubiquitous A-grades, university for all, and the big influx of talented immigrants, you need to know exactly what you’re doing and where you’re going from the moment you rise from your potty to the day you follow your nose into a modern office.

Get the qualifications, gather the work experience, collect your badges and go, go, go – headfirst into a depressing facsimile of what you were led to believe would be your life.

And boy, you’d better be committed. Even if your job is merely to serve hot brown liquid to commuters at an 85% profit margin.

On track for partner by 40

Pity any poor teenager or twenty-something without a master plan.

While they’re busy wondering what it’s all about (life, I mean), some Hermione with half their imagination is already out of the starting gate, hell bent on achieving Grade 4, Level Six Employee-of-the-Month status in record time.

Far from aggrieved that she’s been turned into just another square peg, Hermione will be all foam and fury if she doesn’t feel adequately shepherded through her career by her employers as studiously as any kid tending his ant farm.

In today’s corporate world, the spiritless Hermiones have taken control, which is why long, gossipy lunches, Mad Men-style gender tension, and genuinely creative and inspiring work has all been outsourced to independent outfits who’ve not yet succumbed to pay scales and route maps.

Once named the rat race, for 95% of people the ordeal of the resultant 9-5(-10) is more like being a hamster running on a wheel.

The difference is nobody expects a hamster to be ‘committed, enthusiastic, and a genuine team player’ when he’s running on the spot to go nowhere.

I’m loving it

If at this point you’re shaking your head, then either:

• You’re under 35.

• You create short films for Pixar, you manage an exciting investment fund (fixed interest doesn’t count), you work with animals or kids, or you do almost anything medical. Congrats! Today’s post is not about you or your life.

• You’re self-employed or you run your own business. (Ditto!)

• You still believe what they told you.

It’s excusable to be young, everyone should be so lucky as to get paid for doing what they love if they can, and becoming self-employed is the most realistic escape pod for most of us. (It’s what I did).

But there’s no excuse for believing what they told you.

I was happy to have a job once. Then I reached 30, and younger, fitter versions of me came along to be happy with it instead.

I’d noticed the wrong people got promoted. I saw that when I was promoted or offered new jobs, it was for the wrong reasons. I realised that sucking up was more important than competence.

Finally, I saw that the average office was a white-collar version of a bukakke session – an orgy of desk-based fluffing, slurping, and spitting behind your back.

What about the workers?

To appreciate how the modern workplace can crush the soul of anyone creative and bright faster than Simon Cowell saying, “Really? Who told you that?” then consider this interview with the boss of Whitbread, the owner of Costa Coffee:

Alan Parker, the chief executive who has been with the chain for 18 years, took a £5 million bonus this year for his work turning Whitbread into one Britain’s most successful companies.

Asked if it was time for his employees to share the rewards, the normally smooth Parker prevaricated. “We are looking at improving employee engagement at all levels,” he said. “We take employee morale very seriously.”

Did that mean pay rises? “Engagement has gone up,” he replied, before confirming the pay freeze was lifted.

Let’s repeat that again in slow motion and close-up, with Parker’s mouth opening and closing like a dreadful goldfish of the deep.

“Engagement has gone up,” he replied.

At this point I suppose I should discuss how the average worker just wants this and that, and how ‘engagement’ is a poor parody of the other.

But I can’t be bothered. Really, I’m feeling in a Bolshie mood, and that Karl Marx had a point.

If capitalism had a soul, then all the boring and awful jobs would be the best-paid jobs, and fun careers like playing football for Man United or running hedge funds or being George Clooney would pay the minimum wage.

Instead, capitalism has a sense of humour.

Doublespeak but no overtime

Whitbread CEO Alan Parker’s job isn’t good because he gets paid £5 million a year. That’s an awesome bonus.

Parker has a good job because he’s in charge, he can make things happen inside his company, and because work excites him when he wakes up and never leaves his side.

Compare that to the average worker in a coffee shop. He or she will spend all day making coffee, be abused by customers, and even has to put up with patronizing garbage about ‘engagement’ – with only a piss poor level of hitherto frozen pay to compensate.

While the CEO is moving little plastic figurines depicting his various executives around his industry battle map, his employees are choking on their cappuccinos at the thought they’d come to work for anything other than a day’s pay.

A coffee chain CEO thinks his staff are facilitating a third space encounter for beverage-based mini-break client experiences or whatever waffle it uses to describe fleecing the drones as they make their way to their corporate slave ships, foolishly hoping a shot of caffeine might make another day of being dragged down by the Hermoines a smidgeon more bearable.

But his staff think they are selling coffee.

And they have to sell it like they love it! Like arriving to work in Unit 41B at 8am every morning is almost as good as being the fighter pilot, poet, brain surgeon, or lap dancer that they once imagined they’d become.

They have to love their little part of the big picture, even if it’s not a job anyone ever dreamed about except in one of those “Would you rather have syphilis or crabs?” type daydreams.

If they don’t pretend to love their dreary career convincingly enough, then sooner or later somebody else will come along who can.

McJob R.I.P.

Tune out, drop in

Ignoring for now the downsides, the revolution in art, culture, tolerance, and opportunity that happened in the 1960s occurred because bright people could drop out.

There were plenty of McJobs to clock into half-asleep while you were being a part-time hippy, and a clever person with a degree and fast tongue could sweet talk their way into a career in Bloomsbury or on Madison Avenue when they were done with peace and love.

A disappointing career in a dull office was never the be-all and end-all, but we knew it and admitted it back then.

In contrast, last week I met a top-flight Oxford graduate who has already done nine months of unpaid intern work – racking up huge debts living in London in doing so – and who insists she needs to do more.

She hasn’t had a job yet. I wonder how long she’ll feel engaged for when she does?

Readers, I suggest you consider these new realities of work, and start building a freedom fund pronto. Live cheap, and consider working with your hands or doing something else that keeps you from the Hermiones. And never leave a job you love, because there aren’t many left out there. What do you think?

Thoughts on the week, then some good links.

I want to thank you for reading Monevator. It must be hard at times. Over 1,000 people now subscribe to hear me say the UK economy is growing nicely and that UK shares are good value, while virtually everyone else talks about a double-dip recession and a new bear market.

The truth is neither they nor me can be sure – nobody can be – but at least I’m honest about it.

With the FTSE 100 closing the week at 5,045 and the Dow at 10,142, it’s been a bad year for quick gains. The leading UK shares are down nearly 7%; that’s even worse than the US market, party because of the dire performance of BP.

Shares in the stricken oil giant are barely floating above the £3 level. Its price is down 25% from when I wrote that I thought BP shares were good value.

Was I wrong? Yes, and no.

Yes – In retrospect, the situation was still in play. The political fury was close to peaking, but the well was still leaking oil and estimates of the amount gushing out were rising fast. It would have been safer to wait.

No – I was clear that there were plenty of negatives. I also stressed it can often take a very long time (think years) for crisis situations to resolve themselves. Buying a plunging share is a calculated gamble. Buying one and expecting its price to rise tomorrow is wishful thinking.

Most analysts still have ‘buy’ ratings on BP for the same reason I liked the shares at £4.35. The potential reward seem to outweigh the risks. At £3, that case is stronger, although the final costs have risen as more oil has surged into the gulf and the mishaps have continued.

I’ll probably still not buy, having calculated my exposure through passive funds and trusts is 2-3% already, but I can see why someone else would.

It’s the stupid economy stupid

As for the economy and the wider market, no excuses are necessary. I simply tell it as I see it.

This blog would be more popular if I wrote about buying gold three times a week and screamed the sky is falling. That’s what does well on the web. But the whole point of Monevator is it’s a place for my thoughts on investing, with information on everything from the wisdom of tracker funds to the historical returns from equities, via Star Wars.

The forward-looking tea leaf stuff is a sideshow, but it’s honestly delivered.

With the FTSE 100 on 14x historical earnings over ten years and a forward P/E of 9, I still think shares are a bargain compared to nearly every other asset classes. And that’s partly because I think the economy will continue to grow, despite all the doom and gloom.

But shares are volatile, and reading the economic runes is very much a ‘for what it’s worth’ activity. The small print is the big picture when investing.

[continue reading…]