Presumably there was a time when analysts and economists made a useful contribution to investment society – indeed, presumably analysts and economists are under the impression they still do. They would, however, receive an argument from the growing band of fund managers increasingly stressing the need to tune out short-term ‘noise’ and take the longer view.
This is actually quite a skill, involving as it does not just ignoring the chatter of others but also fighting against some basic human instincts. So argued Jupiter UK Special Situations fund manager Ben Whitmore at a conference I chaired recently as he put a behavioural finance-influenced boot into such investment standards as forecasting, company meetings committees and even the Blackberry.
“The tyranny of the Blackberry” was how Whitmore characterised people’s obsession with short-termism, an unintended effect of which is to diminish longer-term investment returns. To put it another way, even the very best fund managers have off years and an increased focus on the short term may lead people to sell up after one of them and miss out on future outperformance.
For their part, company meetings are unhelpful in behavioural finance terms as they pander to confirmatory bias and the tendency to obey figures in authority.
As for the analysts and economists, with whom we began – well, if any are reading this, they should probably skip a few paragraphs. According to Whitmore, for example, the chance of a stock’s earnings even being within plus or minus 5% of an analyst’s forecast from five years out is 1 in 30 billion – roughly twice as unlikely as hitting the National Lottery jackpot. Furthermore, the average difference between the consensus GDP forecast of economists immediately before each of the last six UK recessions and the actual number during those recessions was just the 366 basis points. This forecasters’ hegemony, said Whitmore, stems from the behavioural finance sins of overconfidence – to which experts are apparently more susceptible than mere mortals – and anchoring (the human need to rely on something).
As coincidence would have it, I have just discovered I have been writing this column on the day an independent review into short-termism in British business was published. This led Aberdeen Asset Management founder Martin Gilbert to encourage investors and management to, yes, take a longerterm view. “Changes to corporate governance, the tax system and infrastructure spending may all help to achieve this but they need to be carefully thought through,” he warned. “Arguably the problem has been made worse by policy tinkering from successive governments, which has done little to promote a long-term approach.”
So politicians also go onto our list of shortterm noise contributors and I am acutely aware we cannot overlook one other group – although the extent to which financial journalists believe they are ever making a useful contribution to investment society is more open to debate.
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