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Even The Smartest…….

I can bet you every teenager since the age of the invention of the mass produced car has through that they invented having sex in the back of a car. This is simply the way our cultural memory works – we are disconnected in many ways from the knowledge and experience of those who have gone before. Therefore we think that we are discovering something for the first time. What prompted this odd line of thinking was that I saw a line chart of Bitcoin and I thought I have seen something like this before. I have reproduced a chart of Bitcoin below.


And I was right – I had seen something like this before….from 300 years earlier.


The above chart is of the share price of the South Sea Company during what has become known as the South Sea Bubble (SSB), one of the original examples of investor mania. Think of it as the Bitcoin of 1720. The chart has several discontinuities that I have removed to smooth the data because the data flow in 1719 was not the same as it is today with changes in price often only occurring once per week. And for interest sake I have laid a 15 period moving average over price. What makes the SSB so compelling is the names of those who were caught up in it. The individual most often cited is Sir Issac Newton who could rightly be described as one of the three smartest humans to have ever lived. It is thought that Newton lost anywhere between £ 10,000 and £20,000 as a result of speculative foray into the SSB. However, much of the talk of Newtons financial folly is incorrect, it is true that he made a fortune in the early period of the boom but like most investors in speculative frenzies failed to withdraw when it became apparent that the boom was over. But Newton had a diversified approach to investing and had risk spread over a variety of instruments which accounts for the fact that he was able to absorb his losses and still have an estate valued at £30,000 when he died.

The figures quoted above are difficult to put into context because we immediately assume the £30,000 loss back then is equivalent to a bit more than £30,000 loss now. It is difficult to map the changes in the buying power of currencies over time. Using simple converters doesn’t actually present a true picture since it is not as simple as saying £X was worth 1 300 years ago therefore it is now worth £X times 10. What is more appropriate measure is to look at the value versus the cost of an physical object – this is actually fairly easy and gives some measure of the size of his fortune. Some 45 years after the SSB, Nelsons flagship HMS Victory was launched at a cost of £63, 176 – so Newton fortune was roughly worth half the cost of a state of the art warship built 45 years later. In today’s terms this would value his estate in the hundreds of millions, which seems about right as a ball park guess. What is most interesting in the SSB is the role of Thomas Guy – the founder of Guys Hospital in London. Guy was ostensibly a bookseller but reality was a shrewd stock speculator who at the time of his death left the staggering sum of  £219,499 to found the hospital that still bears his name.

The issue here is that speculation is nothing new – nor is the expression sucked in and Bitcoin for all its rationalisations is merely another bubble. One of the joys of advancing age is that you have seen it all before. I distinctly remembered being told during that dot com boom that in the future everyone would buy their pets online. Apparently no one thought through the mechanics of stuffing a hamster in a post pack….turns out it doesn’t work so well. Speculation at its heart is an emotional journey that often takes us to places and introduces us to versions of ourselves that we both dont often see and dont want to see. This is what caught Newton – his emotions overrode his powerful intellect and in the end he was little more than a mug punter caught up in the maelstrom of both events and his own emotion weakness.




I Think We Have A Different Definitions Of Success

Investing is hard there is no doubt about that and being an amateur investor is even harder because you have to rely upon the supposed expertise of others. This lack of familiarity with the industry and its nuances combined with a dependence upon others makes life very difficult for those on the outside.  However, this difficulty is further compounded by the total and utter bullshit that is spewed out by the industry as to how successful they are and how indispensable they are, as a case in point consider the following paragraph –

Many superannuation industry participants were surprised at the Financial System Inquiry (Murray) arguing that the superannuation system was inefficient and uncompetitive. This confused many within the industry as there are many great achievements – collectively, the industry has delivered:

  • A 5% annual real rate of return on investments over 25 years.
  • Part closure on the population’s under-insurance gap through group policies.
  • A large capital market which has reduced our reliance on foreign investment into Australia – and we have a large pool of assets invested abroad.
  • Widespread international recognition of the Australian system as one of the most effective in the world

Source – RiceWarner

The cited Murray Inquiry is correct, the Superannuation industry is inefficient and noncompetitive but in my view it is also incompetent and somewhat delusional. If we were to take a step back and look at the primary difficulties that all investors face it would be fair to say that they are primarily psychological in nature. Investing or trading is primarily a psychological endevour. You are constantly engaged in a battle with both your basic programming and your own inner demons. Once these are brought under some form of control then the game does become a little easier. Within the rich cornucopia of psychological maladies that afflict us all you would find delusion to be a cornerstone in many. A large population of traders consider themselves to be much more effective than they really are. In fact the entire hedge industry is afflicted by this curse as it would seem by the above paragraph is the superannuation industry and its cheerleaders.

In the above piece I have highlighted the points which in my mind set the tone for the industry. The industry believes it is a great success because over 25 years it has delivered a real return of 5% – the problem with this is over the same period of time the real return on the market is  8.8%. This differential doesn’t sound like much but in terms of the long term returns of an investment that is continually compounded it is enormous. Consider the data presented below where I have compared the return on a simple balance of $25,000 compounded at both the market rates of return and that of the industry.


The job of a fund manager is to deliver what is known as alpha, this simply another word for skill. If a fund manager delivers a long term rate of return of 10% and the markets rate of return is 8% then you can consider this differential to be the application of skill. The superannuation industry in Australia does the opposite – it is a drag on performance. Yet intriguingly it considers itself to be successful. This delusion has profound effects on investors since they are being charged for the privilege of being underfunded in their retirement. There is an extraordinaire difference between having $84,658.87 in retirement and having $205,902.87  This year the superannuation industry will probably take around $2B in fees yet it will undoubtedly deliver yet another sub par year. This adds to the tens of billions already taken from investors. Outside of politics and the public service it would be hard to find an industry that delivers so little value for such cost to the average consumer.

Whilst I cannot give investment advice I can only reiterate what I have said before. If I had to have superannuation I would opt for an index linked fund with the option to move into cash when required and I would shift in an out of these two options based on the application of a long term moving average over the All Ordinaries as per the free chart below –


Nothing fancy or complex, when the index is above the moving average you move into the index when it is below you move into cash.

Fund Manager Scorecard

Each year Standard and Poors produce a scorecard of the performance of a regions fund managers against their comparison indices. You can find the raw scorecards here.

I decided to download the one for Australia and tidy up the data a little so it was more presentable. The chart below looks at the number of funds in various categories that have failed to match or beat their benchmark over a 1, 3, 5, and 10 year period. Just a reminder this table shows the number under performing, not the number that beat the index.

As you would expect this is one of those – I think I have seen this movie before type of scenarios. The majority of fund managers failed to match the index in all categories over all time frames. I had a quick glance at the scorecards for the other regions and this pattern repeats itself in all regions. The reasoning for this I think is that all managers are captive to the same narrative fallacies and are caught in the same academic, philosophical and psychological delusion. It is not that markets cannot be beaten because there are clearly well known managers who have beaten their index year after year. But if you based your investment strategy on notions such as the Efficient Market Hypothesis, perceptions that you know the value of  something and plain stupid ideas such as we dont need stops because we are smart and would never buy a company that went down. Then you deserve to made to look like an idiot.

However, there is a wider implication and that is the impact that this sort of massive non performance has on issues such as retirement. As I have said before part of the looming retirement crisis could be solved simply by nationalising all superannuation funds and placing everyone in an index fund. Overnight long term returns would double and fees would be more than halved. But there is also another impact and this one in related to the impact of on performance on the broader confidence in market participants. Is it any wonder that Australians opt for real estate as the prime mechanism of passive wealth creation when they hear about this sort of rip off.

Conundrum Of The Day

I have reflected on the post I wrote last week about the great superannuation rip off in which I compared the returns from investing in an average growth fund with those derived from investing in the index. It struck me over the weekend that the majority of fund managers (read almost all ) are followers of the Efficient Market Hypothesis (EMH).  The central tenet of  the EMH is that it is impossible to beat the market because all information is seamlessly incorporated into a securities price and that investor will react in a rational manner to this information.

So the question becomes if the people managing superannuation funds believe this to be true and I think they do, why then then do they have growth portfolio’s? Growth portfolios are in simple terms stock picking portfolio’s designed to beat the market. If you believe you cannot beat the market why then bother with stock picking? This is a massive contradiction and I have no idea how they reconcile this.

But then again they managed to reconcile charging vast amounts for bringing no skill whatsoever to the investment process.

The Great Idiot Tax Continues

It is at this time of the year when superannuation funds crow about how good they have done and of their inestimable benefit to mankind in general and this year was no exception.  So as is my now annual tradition I thought I would have a look at how good they have done and compare that to the real world where delusions about how good you think you are dont exist. From the article I linked to I took this table which looks at the average return of a a growth fund since 1993.


Source – Superannuation returns above 10% for the June Year

This piece acts as a good starting point for comparison with the market. For this I used the All Ordinaries Total Return index which used to be known as the Accumulation Index. It includes not only the price movement of the index but also folds back in the dividends of the index components so it is a good benchmark for simply passively holding an index fund or ETF.


When the chart of the average return of a growth fund is first viewed it does create an overall favourable impression – there are only three negative years and returns seem overall to be quite robust. It is only when you compare this active management with a passive benchmark that you realise how poor local managers actually do when compared to the index. Remember these are people who are paid to beat the index and as we will see they are paid staggering sums of money. Looking at annual percentage returns is quite crude and does lack a bit of fidelity, you dont actually know what the true performance differential is so I looked at the value of $1 invested into an average growth fund and into the index and got the following.


The market leaves the industry for dead – the market investment would now be worth $9.87 versus the industries $5.91 and for this privileged investors have been ripped off handsomely. The chart below looks at what my guess of the annual fee intake of superannuation funds is. For this I have assumed an average fee of 1.5% to cover not only management fees but also advisor commissions.


So to produce a theoretical return of slightly better than half what the market produced  in the period above the superannuation industry has collected probably close to $310B in fees. So to once again steal from Winston Churchill – never in the field of human endevour has so much been paid to so few for so little.

Bulls, Bears & Charlatans

The word ‘charlatan’ is supposedly derived from the Italian word ciarlare, which means ‘to babble.’

Some of the original charlatans were confidence men who would prey upon people’s misunderstandings about healthcare before modern medicine existed. There used to be traveling medicine shows where the salesperson would make promises of magic elixirs that would heal all wounds. It was only after they had moved on to the next town that people would realize they’d been swindled as these tonics were worthless forms of medicine (this is also where the term snake oil salesman comes from).

A charlatan has also been described as someone who professes to have abilities or expertise that they do not have. The term ‘charlatan’ is perfect for the finance industry because it can attract people pretending — whether they realize it or not — to know more than they actually do.

More here – A Wealth of Common Sense

PS: I was going to write something on exactly the same headline but as you can see someone beat me to it…..

Why some billionaires are bad for growth, and others aren’t


A piece in the Fairfax press today referenced a book by economist Professor Paul Frijters called Game of Mates. In essence the books looks at both the political connnectness of billionaires, how this affects their wealth, the wealth of a country and their contribution to innovation. In short it found that billionaires in Australia are highly politically connected with Australia ranking only behind the likes of Colombia and India in the degree to which influence guides wealth. It also shows that locally billionaires are a drain on the economy because of their stifling of innovation and the rent seeking nature of their wealth. True risk taking is not in their nature, guiding and influencing our third rate politicians is.

The piece in the Fairfax press referenced an earlier examination of this work done by the Washington Post which to my eye is a more complete analysis which offers this very salient point –

Looking at all the data, the researchers found that Russia, Argentina, Colombia, Malaysia, India, Australia, Indonesia, Thailand, South Korea and Italy had relatively more politically connected wealth. Hong Kong, the Netherlands, Singapore, Sweden, Switzerland and the U.K. all had zero politically connected billionaires. The U.S. also had very low levels of politically connected wealth inequality, falling just outside the top 10 at number 11.

When the researchers compared these figures to economic growth, the findings were clear: These politically connected billionaires weighed on economic growth. In fact, wealth inequality that came from political connections was responsible for nearly all the negative effect on economic growth that the researchers had observed from wealth inequality overall. Wealth inequality that wasn’t due to political connections, income inequality and poverty all had little effect on growth.

“The negative effects of wealth inequality are largely being driven by politically connected wealth inequality. That seems to be the primary channel that drives this relationship,” Bagchi said in an interview.

The researchers estimate that a 3.72 percent increase in the level of wealth inequality would cost a country about half a percent of real GDP per capita growth. That’s a big impact, given that average GDP growth is in the neighborhood of two percent per year, Bagchi said.

Why is politically connected wealth inequality so bad for a country? The researchers suggest that when wealth and power becomes concentrated in the hands of a few, those business and political elites often influence government policy in a way that hurts the broader interest.

None of this does anything to change my opinion that the hyper wealthy in Australia are simply a bunch of whingers who seek favour from politicians as opposed to doing anything that has a long term inter generational impact.

General Advice Warning

The Trading Game Pty Ltd (ACN: 099 576 253) is an AFSL holder (Licence no: 468163). This information is correct at the time of publishing and may not be reproduced without formal permission. It is of a general nature and does not take into account your objectives, financial situation or needs. Before acting on any of the information you should consider its appropriateness, having regard to your own objectives, financial situation and needs.