In Financial Speculation, Gerald Ashley has some advice for investors.
But he doesn’t really expect them to take it.
With 30 years experience in finance, including Baring Brothers in London and Hong Kong and the Bank for International Settlements, he knows his way around the markets. Despite the changes in technology – fast computers and immense increases in bandwidth – he notes that “… however good the data, or indeed the computational prowess or the organisation, the weakest link in the chain still remains human judgment.”
Ashley illustrates the lack of human judgment, and calls into questions the wisdom of markets, with the example of 3Com in March 2000 when it floated off 6%t of Palm, Inc. – maker of a handheld PC and later a smart phone. Planned for an IPO of $14, it launched at $38 and hit $165, or 1,800 years earnings. Even weirder, although 3Com held 94% of Palm’s shares, its valuation remained stable.
He is a strong believer in simplicity, and urges investors to take the time to understand what they are buying and to steer clear of exotic instruments whose complexity is often designed primarily to hide the profit margins of the issuers.
Sounding a little like Woody Allen, who described a broker as someone who invests your money until it is all gone, Ashley reminds would-be investors, or speculators, that the handsome buildings on Canary Wharf were built on the fees they pay to brokerage houses. Day traders might win or lose, but the brokerage always wins, fee upon fee, not to mention the earnings on traders’ accounts that don’t pay interest.
He urges investors to expand beyond equities and bonds to include commodities, especially gold, oil and copper, and also to consider investing in currencies. A little research into the way prices move – gold and stock prices often move inversely – can open up some investment opportunities.
He also warns of group-think, especially around risk measures like VAR: “The VaR approach has caused herding of selling activity that often spills over unto totally unrelated markets. The denouement of such activity could be the equivalent of a financial nervous breakdown.”
He watches the relationship between gold and oil – how much oil will an ounce of gold buy – usually runs between 10 and 30 and is a “an extremely good indicator for understanding global inflationary pressures. The gold market is the single best asset class with which to understand most other markets.”
Keep it simple and don’t T get bogged down in equations.
“When you are trading, it’s your discipline that counts, not just the most elegant mathematical solution. It’s likely you will find simple rules the easiest to execute, so stick with them.”
And keep a diary of all the details of trading, the simple act of writing down your investments strategies seems to help keep focus.
Ashley sees three dimensions to successful investment – direction, timing and money management – and disciplined money management is the most important.
Filed under: Securities & Capital Markets