Why there is Never Bad News in the Investment Industry

‘The investment business has taught me — increasingly as the years have passed — that people, especially investors (and, I believe, Americans) prefer good news and wishful thinking to bad news; and that there are always vested interests to offer facile, optimistic alternatives to the bad news. The good news is obviously an easier sell.’

Legendary investor Jeremy Grantham of Boston based fund manager GMO

After nearly three decades in the investment industry, Grantham’s observation resonates loud and clear with me.

We (well, the majority of people) are wired to look for optimism — phrases such as ‘when life gives you lemons, make lemonade’ and ‘every cloud has a silver lining’ bear testament to our resilient and generally positive nature.

Our inherent positivity provides the investment industry’s marketing efforts with the perfect platform to promote the upside in every situation — as Grantham puts it, ‘… vested interests to offer facile, optimistic alternatives to the bad news..’

When markets rise to record levels, the industry predicts they’ll go even higher. Buy!

Alternatively, when markets fall to record lows, the industry declares them cheap and destined to turn higher. Buy!

The industry’s view is that there’s never a bad time to invest and there’s never a good time to sell.

A cursory study of market charts shows this not to be true. The Australian share market is still 20% below its late 2007 high. Therefore, selling (or not buying) in late 2007 would have been an excellent call. But the industry is not wired that way.

Consider this extract from one of the industry’s high profile economists when asked for the likely performance of the Australian share market in 2008:

‘The ASX 200 share index is likely to rise to around 7300 by the end of 2008 thanks to combination of reasonable valuations, okay profit growth and solid fund inflows. The normal signs of a major market top are still not present…‘

As it turned out, the ASX 200 ended 2008 at 3700 points (nearly half the predicted level).

We all make bad calls. Yours truly is guilty. However, when the industry makes a call on the markets, it is always up. In all my time in the industry, not once did I hear an economist employed by a fund manager go out on a limb and say they thought the market might be lower next year. It simply wasn’t in their job description.

Yet we know from history that the market’s bullish years are offset by bearish ones. The industry seems to ignore the reality that at times in the cycle there is simply no good news out there. Sometimes you have to be patient and wait for the reward to outweigh the risk. This view is an anathema to both the investment industry and anxious investors searching for some magical pre-determined rate of return on their capital.

Read the rest of this article at The Daily Reckoning