Missing the bull….
Missing the bull in finance is a no no. How do managers of other peoples money think, act and justify their behavior. Edward Harrison on the herd chasing the bull market.
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 ineffciencies 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 as shown in Exhibit 1. The market’s actual price – brought to us by the workings of wild and wooly individuals – is within plus or minus 19% two-thirds of the time. Thus, the market moves 19 times more than is justified by the underlying engines!
-Jeremy Granthan, Quarterly Newsletter, April 2012
Here’s the chart he gives, demonstrating the volatility of herding.
It’s an unforgivable sin in the investment management business to miss a bull market. You’re in the bottom quartile sucking wind while everyone else is cleaning up? That’s when the redemptions come fast and hard. And the next thing you know you’re packing your things and being escorted by security to the door. Who wants to be that guy? No one. That’s what herding is all about.
Full article here.