20/20 T H E C OMMU N I T Y
Green, Gold and Edible
by TOBY BIRCH MANAGING DIRECTOR Oppenheim & Co Limited
This scholarly deliberation is reminiscent of Roman Senators
As pundits peddle insipid predictions for the year to come, it seems incredible how little has been learned over the last few years. There is huge relief among asset managers who have generated positive returns, albeit from a passive policy of investing and hoping for the best. Few seem to care about the cause or consequence of what made markets defy gravity.
Their jobs are safe for now and with a bit of luck their bonuses will be locked-in. While share prices have undergone a roller-coaster ride and commentators have squandered every simile in relating it, certain things remain immovable. The first is the attitude of alpha male portfolio managers that don’t do apologies as well as they do arrogance. To admit an error of judgement, conflict of interest or plain bad luck is the ultimate corporate and financial faux pas. The second is the committee- driven and consensual structure of model portfolios that look just the same as they did 5 years ago.
The reason why many investment portfolios appear so similar is that they cling to core theories of managing money, such as the Efficient Market Hypothesis and the now-discredited Value-at-Risk measures. Like all hypotheses they are built with certain assumptions that academics accept but market players forget. They are not designed to accommodate human foibles, including those that led to leviathan levels of leverage. There is much controversy over their viability, as some believe them to be redundant post-2008. This navel- gazing is missing the point, as pending developments will sweep aside such intellectual niceties. This
scholarly deliberation is reminiscent of Roman Senators who continued to debate trivia as the Barbarian hordes headed for the Metropolis. Few have modified their methodology and cling to the old mantras of money management. While distressing to discard what has been learned over one’s entire career, accepting reality is the essence of evolution where the smartest survive and will eventually prosper. These changes will be as painful as they are colossal but will, paradoxically, benefit future generations albeit at our expense.
With apologies to the literary fraternity that abhors the first person singular, allow me to make some observations in this article that go beyond the convenience of the next calendar year. As a result of such mental role-play, there are certain points in life where one’s sanity is questioned; either by oneself or by others. The last time this happened I wrote a book called The Final Crash1 to warn the public that a market meltdown was imminent. This time round it will be more than financial woes to worry about should my fears prove to be well founded. The penultimate chapter of the book is called “2020 vision”; a happy coincidence with the name of this publication. It highlighted the shift of power and wealth from West to East restoring the equilibrium that existed prior to the Industrial Revolution. Such extreme forecasts are fretful for the investment community that occupies a supposedly safe middle ground. Fear of change is the enemy of innovation and typical of dying industries that cling to dysfunctional habits through familiarity rather than observation of reality.
It is one thing to write text and tell [1] The book was written over 2 years (2005 - 2006) and was published in April 2007 20:20 100
people what to do; it is another to lead by example and provide a mechanism for change. To do so, Oppenheim & Co is designing a fund called Gaia Opportunities that I will manage with research provided by business partner Vladimir Lekovski, a climate change sage. After launch in 2011 it will only be open to professional investors. While the motivation is of course financial it nevertheless provides a practical platform for progress that is more powerful than mere words.
Given the dominance of High Frequency Trading one may question whether an investment fund is the right vehicle to effect reform in the real world. Just because markets are being artificially moulded does not mean they have mutated for good. They will undergo a transformation of ‘swords to ploughshares’ but for now are swelled by printed money and the erroneous assumption that the US Federal Reserve will prevent prices falling too far. While recognising that financial markets are prone to manipulation by central banks and institutions alike, we should not forget that the price mechanism is essential for drawing money to the right place in the most timely, efficient manner. The flow of capital is far more powerful than another round of stilted statute. With the best will in the world, projects don’t progress without finance so we must use market mechanisms that for once will benefit the real economy rather than the banking sector.
Before offering solutions we must first identify the signs and symptoms of what is to come. There is an old saying that history does not repeat but it does rhyme. The similarities with the 1930’s are becoming more
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