How the investment industry will fall on its own sword, and others will take over

11 Jul

Investments are meant to generate a return – but what happened?

Investors want consistent growth on their investments but few in the industry understand how to produce that. Those who don’t face their demise, whereas those who do, stand to take the spoils.

In many professions there is huge chasm between those are inside that profession’s bubble and those who are not. In politics, if an idea is not being circulated in the Westminster bubble it is not considered to exist. In education, if something has not been deemed worthy of putting on an exam syllabus or the mark scheme, then it is not considered worth teaching. The problem is that with such an insular attitude and so many closed minds, these professions alienate themselves from the real world. The consequences of such mean that we have politicians of all parties who are entirely mediocre, and a large number of school leavers who collect a string of A grades and yet remain unemployable.

The reason I mention this is that the finance industry suffers from a similar malaise. Although investors want to make a large consistent return on their investments, the investment industry in the UK has produced returns on investments which have been worse than monkeys, whilst charging enormous fees. The reason why this is allowed to continue is due in part to a certain level of financial illiteracy, whereby people don’t know where to find the best deal. But the main reason is that the industry is such a stale establishment, that nobody has stolen the show and made a product which blows the others to smithereens.

At the other end of the spectrum to the UK’s finance industry, we have the American technology industry. You have Google, Apple, Facebook and a zillion other bedroom start-ups all intensely competing to innovate and make something which disrupts the market. This has led to an industry which is very good a producing outcomes which benefit society. Could you imagine a world without Google? Exactly. But their dominant position could rapidly be stolen if something better came along. In which case NewOnlineCompany’s products would be better and society would have benefited from them.

The problem is that politicians don’t understand that the best solutions come from real people, educators don’t realise the best learning comes from outside the classroom and that few in the finance industry understand that investors want a net return on their investment. Investors want to make a consistent return year after year, yet few investment firms aim to do so. Most of the investment industry has forgotten that they need to make profits on investors’ money – they are merely wedded to ideas like “modern portfolio theory” (MPT) and “diversification”.

The epitome of this approach is that stock market funds are forced to invest 100% of their fund, 100% of the time. So even if you know the economic forecasts are dire, the stock market is overvalued, it’s crashed 10% today and is probably going to fall another 40% – as a fund manager you still have to hold all your investments in a falling asset class. It would make sense to sell out now, and just hold cash, but you are forced to keep all your money in shares. It’s ludicrous!

So this leads us to the question – how do you generate a positive return, year after year? Nobody can ignore the fact that every asset market is cyclical. Whether your money is in property, bonds or the stock market – these have been all been known to fluctuate greatly. But the important point is you need to be proactive in buying and selling investment funds at the right time. In which case you can earn all the upside during a bull market, and be out during the bear markets.

Investment providers, mangers and independent fund advisers who take this approach and focus on generating an absolute return, despite market conditions, are the future. Those who don’t adapt to this model will fail. This is where St James Place, Aviva and many others are going to be consigned to the dustbin of history.

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Posted by on July 11, 2012 in Trading Ideas


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