Rational Behaviour Not “Normal”!

This week we have invited respected investment advisor Philip Carman to share his thoughts on how professional fund managers earn their daily crust.

It is an interesting perspective but nonetheless something to take into consideration if you are looking to have your superannuation managed by the big fund managers.

Philip Carman:

Not that share markets have ever been particularly rational but they are now less rational than usual. Maybe it’s because they’re falling sharply that they appear irrational to those who predicted shares would provide increased wealth and “better returns than other markets”? The reality is and always has been that investing in someone else’s business (buying shares) has always been fraught with risk.

But especially when outcomes are determined by a mix of “investors” who are either playing with “Other People’s Money” and/or betting on short-term trading patterns. Only a tiny fraction of the money sloshing around the share market is controlled by its ultimate owners. The vast majority is pushed about by young professionals, paid to look like they know what they’re doing and to be “focussed”, “motivated” and “dynamic”. rather than, circumspect and deliberate as you and I would be when managing our own affairs.

Worse, most are rewarded for volumes, and profits generated for their trading houses. So, not only are the owners not in control, but many of those who are pulling the strings are motivated by factors other than maintaining solid, consistent returns.

The great myth of economics –

that people behave rationally and always act in their own interests – is as silly as the principle that the people in charge must surely know what they’re doing. (“How else could they have reached such lofty positions??” is the common exclamation.) And both of these commonly held notions have been disproved so often that it beggars belief anyone still pays them any attention…yet they persist in the public realm because they are pushed at us every day across a range of broadsheets, tabloids, TV and computer screens. We can’t escape the media’s inane financial sideshow even in a hospital waiting room or at the pub!

And you can’t blame the feckless reporters for swallowing the market’s bunkum and then regurgitating it almost verbatim. They usually have earned their BA with a major in some subject other than that about which they are writing and have too little life experience to discern truth from lies; spin from back-story, or bulldust from history. And their sub-editors (where they still exist) are either a few years older (and no wiser) or on the lookout for a better-paid position with a corporation or political party and unwilling to tread on any toes for fear of biting the hand that might one day feed them.

The workings of most markets are revealed to the public by commentators who have little or no idea of what they’re seeing, while those close to the action and who are interviewed for “insider” stories have hardly any more idea of what they’re doing! All this collected and analysed wisdom is then passed on to investors leaving them to decide what to do next, OR they can choose to let some of those youngsters mentioned earlier, manage their money for them at further cost. With the conventional wisdom that it’s better to be in the market than out, it is no wonder great swathes of wealth are being forfeited, daily?

PHILIP & ALISON CARMAN
Directors; Principal Adviser and Partner
BRIAN BAYNAM Associate
ELIZABETH McDONAGH Accounts Manager
Personal Asset Services Pty. Ltd.
E-mail admin@paservices.com.au

Thanks Philip for your insights..

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