Saturday, July 12, 2014

John Maynard Keynes Loves Lemmings

"Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally"

John Maynard Keynes - "The General Theory of Employment, Interest and Money"

As a retail portfolio manager who runs individual investment accounts, words can't describe how much I dislike the quote above. To me it's a cop out - it's lazy, ill advised and ultimately ends up hurting clients. 

Is it really better for one's career to be wrong along with the majority than it is to stick to a well thought out long term strategy that may be 'out of favor' or unappreciated at the moment? 

To me, Keynes seems to be endorsing a kind of "Blind Lemming" approach to investing. The sweet irony here is that the whole lemming "mass suicide" thing is a myth that has been perpetuated by humans for eons. Of course reality follows logic: No, lemmings aren't dumb enough to blindly follow the masses off a cliff "just because everyone else is doing it". Unfortunately, many in the financial industry didn't get the "lemming myth" memo and instead have invested (their client's money) heavily in the myth. 

Sure, career risk is very real and something that all of us have to be aware of - but does that mean we need to blindly follow or invest in something that we don't believe or understand, just so we can conform with the majority? 

"The opposite for courage is not cowardice, it is conformity. Even a dead fish can go with the flow"

Jim Hightower

said another way

The Keynesian lemming model can be found everywhere in the financial industry. Sure, it's not CALLED the Lemming model - because that would raise red flags. Instead the Lemming model for finance has been subtly hidden in pithy, bold, and well-known investment mantras such as: 

"Don't fight the Fed" 


"The Trend is your Friend".

"Don't fight the Fed" is considered good investment advice? Really?

Are we talking about the same Fed that had a hand in creating the bubble, the housing bubble, and the financial crisis of 2007/09 (to name a few)?

If it is - then why in the hell would you ever want to hook your wagon to their track record? 

Forget the Fed for a moment. Instead assume there was a pilot who had a history of acting irresponsibly. Over the last 15 years, this pilot's irresponsible actions led to him to crash his plane twice, causing untold damage, death and pain. If we follow the same "Don't fight the Fed" logic, I should be seeking out said pilot when I choose to travel, and be happy and excited about flying with him. Does that make sense? 

Assuming the irresponsible pilot doesn't recognize that he has a problem, and therefore doesn't change his ways - what is the likelihood of us being involved in another crash? 

Following the same thought process then - if the Fed doesn't recognize that it has a problem, and therefore doesn't change it's approach - what is the likelihood of another Fed induced crisis/crash?

Sure, maybe it's a few years down the road.. but my point here is don't mindlessly "go with the flow" simply because everyone else is doing it.

If you are going to invest - have a model, have a method, have a discipline. 

The best, NON-Lemming quote I've seen in a while is this: 

"I would rather lose half of our clients, than half our client's money"

Jean Marie Eveillard

Perhaps this issue doesn't apply with the institutional side, or for people who simply trade their own capital - but for running other people's money - it's absolutely KEY. 

The last thing in the world anyone on the retail side wants to do (assuming they care about their client's well being, and aren't a sociopath) is blow up a client's financial future simply because they were "following the masses" in an effort to not look stupid. To me there is nothing more intellectually dishonest than sending out a "There was no way to have seen this coming" letter to try and explain what went wrong AFTER blowing up a client's account on a correction that they should have seen coming. The DOT.COM and 2007/09 corrections are PERFECT examples of situations where a broker 'should' have seen it coming - I mean really.. it wasn't rocket science. 

Unfortunately today, I am seeing a LOT of complacency on the retail side of the business. Too many brokers walking around thinking the returns they are earning is because of their own brand of genius rather than the plethora of financial morphine sloshing around in the system. I've overheard "It's almost too easy" and "it's like shooting fish in a barrel" far too many times for my liking - just as I did in '98, '00 and '07.

While many may assume I am a 'perma-bear' I can tell you I am not - I am a realist. If and when the investment environment changes, my views will change. Unfortunately from where I sit, nothing has really changed. The problems, flaws and abuses continue to exist and there seems to be no desire to change the approach or come up with a workable solution. This is something I've been saying since 2009, although I have noticed more and more people are starting to suggest the same thing - (Maximillian Zimmerer, CIO of Allianz SE recently said "The fundamental problems are not solved and everyone knows it")

So what to do? 

All I suggest is that investors be keenly aware that many of those bold and courageous quips we keep hearing from CNBC and the TV gurus aren't calls to be wise. Instead they are fluffy, ill thought out calls to conform to the Lemming Mentality. It's a call not to think - but to just mindlessly go with the flow. 

So, when someone gives you a little investment advice such as: 

"The Trend is your friend"

"Stocks always outperform over the long term"

"Stocks are the only game in town"

"The market can stay irrational longer than you can stay solvent"

"Don't fight the Fed"

"The economy isn't the stock market"

"The consumer doesn't matter"

"Earnings/Sales/GDP/Wages doesn't matter"

"It's a whole new paradigm"

"The cleanest dirty shirt.."


"This time it's different"

know what they are really suggesting is this - 

Yes - Maybe it will take a while for reality to hit, for the mean to revert or for fundamentals to matter again.. but at some point they will - because they always do. All I'm suggesting is that if you run money on behalf of someone else, that you be keenly aware of Keynes' endorsement of the lemming myth. 

Just a thought.