Stepping Away From The Fray!

It is always refreshing to take a step back from the day to day push and pull of financial markets to try and re-frame your perspective. A couple of weeks away has hopefully helped me get a broader view of the big picture in the world of Wealth Management where I hang my hat. Of course we can never truly be "away" in my world. Looking after clients is always a 24/7, 52 weeks of the year kind of responsibility. However, looking on from a greater distance can open your eyes a little wider.

I did spend a little time thinking about "Irrational Exuberance",  a term coined by former U.S. Federal Reserve Chairman Alan Greenspan back in the 1990's. It was subsequently the title of a book by Nobel prize winning economist Robert Shiller:

"In explaining the origin and attributes of speculative bubbles, the author persuasively examines the structural factors - politics, technology and demography - underlying them, the cultural factors reinforcing them and the psychological factors driving market behaviour." 

Speculative bubbles, he insists, are very real, the result of the "combined effect of indifferent thinking by millions of people... motivated substantially by their own emotions, random attentions, and perceptions of conventional wisdom."

Which of course begs the question: is it my job to attempt to bring rational thought to a client who has no sense of risk, even if it might mean that she/he may otherwise move to a bank advisor or other (with no fiduciary responsibility) who will make promises that are dubious at best and just move her/his money into their in-house "growth" funds. My moral compass tells me that I must live true to my own sense of what is right.

These are the difficulties we face as portfolio managers in the late stages of a bull-market: too many years of above average returns impacting emotions. Behavioural finance will coin this as "recency bias", where human emotion takes over and we simply expect what has been happening for the last couple of years to automatically continue well into the future.

It makes for a difficult conversation when we know that there will come a reckoning in which we, with a fiduciary duty to our clients, must protect them. Should we let our client's take on unreasonable risk just to keep them as clients?

Prof. Shiller's latest work is titled Narrative Economics where he explains that we are victims of a set of narratives or stories where "Adherence is probably even worse when it comes to following advice from more controversial economic pundits or financial planners. But where does advice end and speculation begin? And how do we distinguish informed speculation from confabulation or fiction? The slope is slippery. Ultimately, a story's contagion rate is unaffected by its underlying truth. A contagious story is one that quickly grabs the attention of and makes an impression on another person, whether that story is true or not."

Something to consider in the world of financial media and investment blogging / social media. As I have said on many occasions in the past, beware the writer's agenda and motivation.

On the plane, on my way home, I came across this analogy for current market sentiment from a usually middle of the road economic commentator:

Ready to get back into the fray, armed with my updated level of knowledge of the psychology of markets and the ongoing battle to bring the best possible me to the management of our clients and our own collective wealth.