Wednesday, June 17, 2009

Suspension of Disbelief – The Theatre of Investing

Many years ago, I worked at one of the premier investment houses in the UK. My team had come through both the Tequila and the lesser Tango crises with flying colours.

We took a good look at the emerging world around us, and we did not like what we saw. No matter how we crunched the numbers, Emerging Asia was going to take a bath, and the longer this was delayed, the worse it was going to be. Convinced that we were right, we put this to the Asian Team.

“You are STUPID” the Head of the Asian team, and coincidently Head of Equities, snarled at me. “Asia is too well managed to ever devalue; only Latin America is that badly managed!”

No matter how we tried, he was not going to discuss it, and, shortly afterwards, I was “invited” to resign as I “clearly did not have what it takes to be an investment manager” at said house.

Ten years later, happily ensconced in a large asset manager here in Montreal, I started to see the same phenomenon, even if less vehemently put.

My colleagues who managed assets in Europe and the US were getting very nervous about excessive valuations in their markets, driven by cheap debt and unrealistic expectations.

For me, the final straw came during a discussion of the US housing market; when my US colleagues started talking about NINJA loans, Liar Loans, and then, the killer, Negative Amortization Loans. I dropped an “F Bomb”. “They are what blew up the Mexican banking system in ‘94”. No one would take the counter argument. We all knew that things were going to go horribly wrong, and the longer it took to get there, the worse it was going to be.

Meanwhile, the Executive floor was behaving as if we were at the start of an economic boom. They pumped more and more assets into illiquid strategies, Alternative investments, and the ever-popular hedge funds. No matter how hard we argued that these strategies would end up costing money, we were always rebuffed. We could not possibly be right, as we were only fund managers.

One could have made the same observation at all levels of the investment industry during the Tech bubble. What was so clear to most people was a heresy to so many others.

It goes beyond “it takes two views to make a market” and psychologists probably have a great name for it but the only simile I can find is the suspension of disbelief; the necessary element in both the theatre and cinema where we tell ourselves to believe something that is clearly not real.

Few would argue that the current world situation has many of the elements of theatre; So many politicians seem to be ensnared in the traditional Greek cycle of hubris and nemesis; the economy looks like a ‘70’s disaster movie; are today’s “Green Shoots” part of some new “feel-good chick-flick”, or that last feint in a “slasher” movie? Is it happy ever after, or is the bad guy about to return from the dead, unleashing yet more blood soaked mayhem.

Who knows?

I just wish the investment industry did not look so much like a Marx Brother’s farce.


  1. That senor management didn't buy into your view seems to be the reasonable outcome. The only way they could capitailze on your market view was to completely restructure the firm's investment strategy, if they got it wrong they would have been fired... On the other hand if they did nothing, like lemmings, they would be safe, since the "entire market collapsed".

    Did investors get screwed, of course, does anybody care no.

  2. Nice article Keith! ...And nice quick and dirty psychological analysis there Finance, that (unfortunately) makes all too much sense.