The price of everything

On risk and reward

 

“On Sunday, the eyes of the world will be on the Oscars. But two people already know who's won.

You've never heard of Martha Ruiz and Brian Cullinan. They haven't been in any films or on any magazine covers. But they will be the most important people at the Oscars.

They are the only two people in the world who know the names of the winners before each award presenter rips open the golden envelope and says the immortal words: "And the Oscar goes to..."

Ruiz and Cullinan have counted the votes - and counted them again, and again, to make sure the results are correct.”

• ‘The woman who knows who’s won the Oscars, but won’t tell’, Ian Youngs, BBC News.
  
  
  

It would be difficult to imagine modern life without a conception of risk. In the words of Peter Bernstein, whose Against the Gods amounts to a biography of risk,

“The revolutionary idea that defines the boundary between modern times and the past is the mastery of risk: the notion that the future is more than a whim of the gods and that men and women are not passive before nature. Until human beings discovered a way across that boundary, the future was a mirror of the past or the murky domain of oracles and soothsayers who held a monopoly over knowledge of anticipated events.”

Thinkers and mathematicians gave us probability theory and in doing so fashioned the apparent chaos of chance into at least a semblance of order by way of risk management.

“By defining a rational process of risk-taking, these innovators provided the missing ingredient that has propelled science and enterprise into the world of speed, power, instant communication, and sophisticated finance that marks our own age. Their discoveries about the nature of risk, and the art and science of choice, lie at the core of our modern market economy that nations around the world are hastening to join. Given all its problems and pitfalls, the free economy, with choice at its centre, has brought humanity unparalleled access to the good things of life.”

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An opinion, not a fact

“Now, what I want is Facts. Teach these boys and girls nothing but Facts. Facts alone are wanted in life. Plant nothing else, and root out everything else. You can only form the minds of reasoning animals upon Facts; nothing else will ever be of any service to them.”

• Thomas Gradgrind in Hard Times, by Charles Dickens.

 

It is all very well to insist upon facts – but whose ? The election of Donald Trump has thrust the topic of ‘fake news’ into the spotlight, as if there were some legitimate and objective alternative. But everything is narrative as seen through human eyes, as the author Yuval Noah Harari points out in his outstanding book Sapiens. The late Hans Rosling, physician and statistician, once told a Danish TV journalist:

“You can’t trust the news outlets if you want to understand the world. The facts are not up for discussion – I am right and you are wrong.”

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The proof

“CreditEase, one of China’s biggest peer-to-peer lenders, has set itself a Herculean task for the next 10 years: taming the country’s notoriously volatile retail investors by introducing them to the idea of portfolio management.

The typical household’s approach to wealth management was “to throw investment opportunities together, so your overall portfolio structure is all over the shop”, said Tang Ning, chief executive.”

• ‘Robo-advisers look to tame China’s retail investors’ by Yuan Yang, The Financial Times, 30 January 2017.

 

 

Successful investing involves having an edge. If you do not know what your edge is, you do not have one. Tang Ning’s observation above rings true; there are doubtless many investors who, in the absence of a general strategy, have accumulated a portfolio of sorts more or less randomly on the back of colliding haphazardly over time with motley financial opportunities, some of which have somehow appealed. The financial media clearly play a role in bombarding their users with arbitrary investment stimuli.

Robo-advice may be an improvement on random investing, but it seems to solve one problem (the presumed high cost of investment provision) by creating another (passive investing guarantees mediocre returns, or the market average return, less the cost of fees).

But there is another, more insidious, problem with passive investing, exemplified by the looming flotation of the owner of Snapchat. Snap’s IPO offers the hardly alluring prospect of a share class with no voting rights at all. Individual investors are of course welcome to pour their money down whichever drains they choose. But the rise of low cost ETFs – alongside the already substantial numbers of index-trackers, explicit or otherwise – means that there will be plenty of institutional investors obliged to follow them; the Financial Times cites Anne Sheehan, the head of corporate governance at Calstrs, the California teachers’ pension fund, who points out that many benchmark-following funds will be forced to own Snap once it is included in stock market indices, whether they want to or not. Come to ETFs for the focus on low cost; stay for the guarantee of exposure to low quality assets.

To read more, Download The proof