So the industry needs to become more creative in its thinking?
Well, some people can think a bit more broadly – with more latitude and curiosity – and I think this would be quite useful! Some of the best asset managers and individual people I’ve met haven’t come from a business or an economics background; and any firm in finance that decides it won’t interview people with an arts degree is really missing a trick. We don’t want the industry to become full of automatons that have all got the same business degree, that aren’t prepared to challenge each other and themselves. I’m exaggerating to make a point, but when I first started in UK pensions, it was a pretty white, middle class male profession. Things have changed massively in the past 10 years; now it is much more diverse in every sense of the word and that’s a really good thing.
Does diversity make for better decision-making? What does the evidence show?
It shows that more diverse committees, more diverse groups have a better decision-making process almost automatically, because they’re likely to avoid group-think and they’re more likely to challenge each other.
Institutional investors should be longer term in their investment thinking, but can be swayed by short-term noise. What role does that timescale play in this?
It’s really important. The noise in our industry is phenomenal and people latch on to the last bit of big news as if it’s the only thing that mattered. In 2016, markets started off with lots of worry about China, by the middle of the year it became Brexit and then finally Trump and yet the equity market finished up – in the UK about 17%. Most people wouldn’t have dreamed of the market being up and yet these events occupied so many investors’ minds. There are obvious clues and signs that we all latch on to, for very good reasons because we’re humans, we want explanation, we want the narrative to explain it; but often they can prove to be highly misleading or distracting.
On the theme of hindsight and the biases this creates, looking back on the financial crisis, do you think we’ve learnt much since?
I think we’ve learnt a lot about the mistakes that we made, but also that human behaviour is hard to change and there will still be, to use the cliché, greed and fear. So, I’m certainly not one of those people who think that we won’t see booms and busts again, but I do think there have been some good regulatory lessons learnt, I think there’s been a tidying of the system.
Much is being made of active management’s inability to outperform. How much luck and skill do you believe is in the game at the moment?
Well there’s always luck and skill in any performance or activity. If you think about a continuum where something could be 100% luck or 100% skill, what could be 100% luck? The Lottery or roulette. What could be 100% skill? Most people would say chess. Where does our industry fall on that performance continuum? The results suggest, in aggregate, we’re not nearly as skilful as we’d like to think we are. I’m not dissing the industry because I’ve worked with some really smart investors whom I would regard as skilful.
What makes an investor skilful?
They challenge themselves, they’re prepared to admit they don’t know sometimes. They tend to either consciously or unconsciously attempt to avoid losers as much as they try to pick the winners. They try and learn from their mistakes; and they realise that time is on their side if they have patience. But if they don’t have patience, noise becomes the most dominant force.
With that in mind, who do you think are the best investors?
There are plenty of good investors out there in plenty of good firms. I wouldn’t want to name them individually beyond Warren Buffett because everyone knows him, but I know one when I see one because they tick some of those boxes – particularly the idea of patience.
What do you make of the move towards passive investing?
I think that reflects nothing more than disappointment with active after fees and I can see why there’s this move towards indexing. Where I as a behaviouralist have a real problem with benchmark indexing is that few people ask, “Well, what index?” The most commonly used indices in the world, the market cap-weighted indices, are wonderfully simple; they’re liquid, they’re traded daily, they’re easy, but the problem is they contain a lot of human biases because if a stock is overvalued, it will have a higher weighting in the index than a stock that’s undervalued. So, immediately you’re locking in certain biases.
What do you do with your own money?
I try and apply the same sorts of rules that I talk about. So, one thing I try very hard to do is if I’m going to have a view on something, a positive view, then I’ve got skin in the game. The amount of armchair experts out there who, for example, post-Brexit were absolutely adamant they knew which way all the markets and economies were going, but had no skin in the game. If you’re going to try and persuade people your view is absolutely worth following, you have to have skin in the game. For my own money, just for the record, I keep it in a diversified set of unit trusts, run by fund managers I trust.
Do you find behavioural finance is viewed as perhaps ESG once was, as a soft factor in a harder economically and financially-driven industry?
It’s an interesting comparison because, in the final analysis, if people don’t want to look at it and still produce good results, that’s fine. My challenge to them is that the industry didn’t actually spot the world’s worst financial crisis coming since the 1930s by following more traditional economic models; so why wouldn’t you want to include behavioural stuff in your armoury? It’s quite an arrogant thing to say that, “I don’t want to learn anything more”. All knowledge is power and that may be the power just to discard it, but at least consider it!
One of the criticisms about behavioural stuff is that it’s pop science. However, I would argue that as a practitioner in the industry, it seems to have hugely beneficial results if you pay attention to it; and if you ignore it, you ignore at your peril.
