Are You A Born Investor?

Your Stocks in Your Genes

One of the many problems that have perplexed economists, along with why more people aren't like them and why no one listens to them any more, is why more people don’t participate in the stock market when it's regularly feted as being the safest place to put your money, long-term: the so-called equity premium model (for more of which see Mental Accounting: Not All Money Is Equal). Of course this isn’t necessarily true, as it’s been shown that it's another myth of the market, but given the amount of money spent on promoting the idea of stocks as bound to outperform, it’s as good as, and you might expect people to invest accordingly.

One line of thought suggests that the participation puzzle of why more people don't invest in stocks may be explained by genetic differences in brain function. As usual, IQ is a suspect, but the evidence suggests most investors are as dumb as everyone else, especially IQ researchers, and we should look instead at an old friend: emotions. It may be that some of us are just born investors.

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Ideology, Paving the Road to Financial Ruin

"A fool and his money are soon elected" – Will Rogers

An Emergent Crisis

In Ending the Divine Right of Bankers we looked at the way in which democratic governments have become subject to the whims of markets: and how markets may soon find themselves bowing to the dictats of voters. However, this is only half the story because it would be a mistake to see this as an orchestrated outcome by a cabal of shadowy figures. Instead it’s just happened, an emergent property of the interaction of democracy and capitalism.

Of course the road to ruin is littered with good intentions and what we’re now seeing is the natural tendency of trends to overshoot. It’s the result of a nasty combination of free market ideology taken to extremes and the self-interest of corporations, exploiting any opportunity to enhance profitability and bonuses. It is, as ever, an outcome of combinatorial human behavioral errors rather than a set of deliberate policies.

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Stuck In A Weimar World?

Rich and Poor

In many ways the problems of the Eurozone are hard to understand: as the US Secretary of State Timothy Geithner has pointed out:

"The problems that they are facing there in Europe are complicated to solve, but well within the resources that Europe has."

So the sight of the rich asking the relatively poor Chinese to bail them out, or attempting to put the squeeze on the IMF is perverse.  The Chinese wonder, if the weaker Euro countries are such good investments, why don’t the Europeans put their money where their begging bowl is?

Of course, if you delve deep enough, the problem is psychological, and is magnified because the Eurozone is made up of independent countries following their own paths. But at the heart of the problem is Germany, the country that has benefited more than any other from the euro and which is now unwilling to accept the consequences of its Faustian pact. For the Germans it’s heads they win, tails we all lose, because they're stuck in a Weimar world.

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Disruption by Digital Wallet: The Sailing Ship Effect Rewritten

From Sailboats to Digital Wallets

When steamships were introduced they caused a significant improvement in the technology of the sailing ship, as shipwrights worked to increase the capability of their ancient craft to keep the newfangled interlopers at bay.  Of course, we now know this was to no avail, as technology and service improvements to steam-power eventually combined to override the best that sail had to offer.  Disruption happened, but slowly.

In the world of payments we now have more disruption: a payment card in your smartphone, integrating retail payments, mobile communication and digital advertising, with Google simply the biggest new entrant on the blocks.   When your smartphone is also your digital wallet and you can use it to buy stuff in shops faster and more securely than with your credit card then the walls of Jericho are really falling: the question is, who are the modern equivalents of the sailing ship manufacturers?

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It’s How Big, Not How Often, That Counts

Soros' Batting Record

George Soros, one of the greatest investors of the last fifty years, has a fairly poor batting record when you look at the total number of strikeouts he’s had over his career. By his own account he’s been wrong about investments more than he’s been right. However, when he’s been right he’s been right BIG time:

"It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong"; 

Unfortunately human behavioral biases make most of us shy away from taking lots of losses and trick us into giving up the potential big winners. Our problem is that our biased brains punish us much more for failure than they reward us for success: so we prefer frequent small wins and few losses to frequent small losses and few wins. And, as Soros proves, our brains are wrong.  Fortunately there are a few simple techniques that guide us right.

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Ending The Divine Right of Bankers

"The bank mania… is raising up a moneyed aristocracy in our country which has already set the government at defiance, and although forced at length to yield a little on this first essay of their strength, their principles are unyielded and unyielding. These have taken deep root in the hearts of that class from which our legislators are drawn … and thus those whom the Constitution had placed as guards to its portals, are sophisticated or suborned from their duties."

Thomas Jefferson, Letter to Josephus B. Stuart, May 10, 1817

Kings By Any Other Name

Thomas Jefferson's fears about the potential capture of government by a wealthy minority mirrored his experiences in Europe where, acting as the American ambassador to France before and during the French Revolution,  he saw at first hand the effect of government under the control of the rich and the powerful, where hereditary monarchs ruled by divine right: by the will of God. In Jefferson's view the American constitution needed to ensure that the state was prevented from setting aside its revenues for a favoured few: because otherwise the difference between the actual aristocracies that governed Europe in their own interests and the "moneyed aristocracies" overseeing the United States would differ in no way meaningful at all.

Equating this version of democracy with capitalism is no great leap: if everyone is possessed of equal rights and opportunities then that some succeed and become wealthy and others fail and don’t is to welcomed. However, if the rich and powerful can suborn the government to protect their interests at the expense of everyone else, then this is not capitalism; and it risks being not democracy, too. That those who rig the markets in their favor then accuse those who protest of being anti-capitalists is no surprise, merely the behavior of tyrants everywhere.  Capitalism requires that those who take risks and win should be rewarded, and that those who lose should be punished, not bailed out by a compliant state like a medieval monarch dispensing largesse by divine right.

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