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Stewart Cowley: it's a wonderful life

Stewart Cowley: it's a wonderful life

I have some corporate bonds that I’ve held for about five years that mature in 2019.

The bonds are investments in companies that pay their interest on time and will hand back the original sum invested at maturity; the income they produce pays for my children’s school fees. They have gone up and down in price a lot during the financial crisis but I have never touched them because they satisfied my needs. I am very happy. 

I have been advised from time to time to sell them and buy something else because I should want more, even though my needs are already being met. People have pointed towards indices and told me that I am, in all respects, a fool for not switching from one thing to another.  

This is an interesting phenomenon to me because, as far I can tell, there are no cases where human beings are any happier when they switch from what they need to what they want or are told they want. There is always a residual sense of discontent afterwards.  

To illustrate my needs/wants dilemma it would be useful to become a student of the film ‘It’s a Wonderful Life’.

It seems to me it is the receptacle for all that you could conceivably need to know about finance and banking; it contains all the frailties of the psyche’s relationship to money whilst illustrating the needs/wants dilemma more lavishly than should be possible.

There is a scene at about 55 minutes where there is a run on Bailey Bros Building and Loan Association because the local venal banker, Mr Potter, calls the loan it has made to its smaller rival. Uncle Billy has to hand over all the ready cash that keeps George Bailey’s Building and Loan afloat.

They now have no reserves. Savers get wind of it and cause a run on the bank, demanding their money back. In a moment of self-sacrifice Mary, George’s new wife, holds up two thousand dollars they were about to spend on their honeymoon.

The gathered hoard approaches the till:

George Baily (GB): Alright Tom, how much do you need?

Tom: Two hundred and forty two dollars.

GB: No Tom, just enough to tide you over ‘til the bank reopens.

Tom: I’ll take two hundred and forty two dollars…

GB hands him the money. Ed approaches the counter.

GB: OK Ed.

Ed: Well I got three hundred dollars here George…

GB: Well what’ll it take ‘til the bank opens – what d’ya need…

Ed: Well I suppose twenty dollars…

GB: Twenty - now you’re talking. Thanks Ed…. 

And so it goes on, each person reducing the amount they want to the amount they need until the Building and Loan closes, solvent, with one dollar in reserve at 6pm.

But there is a scene missing here of course; the one outside the bank afterwards. Of the two people who received money, after they exited the door, which one felt good about themselves? Tom who received two hundred and forty two dollars or Ed who received twenty dollars? My money would be on the latter. There is residual discontent because wants rather than needs have been satisfied. 

But we have an industry that is based upon, and positively encourages, the idea that investors appeal to their wants (or what they are told they want) as opposed to listening to their needs.

They are told that they perpetually should want their investments to return the most that is humanly possible – all of the time. It should be blatantly obvious however, to any sensible person, that this is simply impossible, and that anybody who tells you it isn’t, is a charlatan.

Now when you start down the ‘wants’ path you set up a new game called ‘Who’s right?’.

‘Who’s right?’ assumes there are only two results in life, namely right and wrong; with that come the ideas of reward and punishment.

Fund managers who are ‘right’ are rewarded and those who get it ‘wrong’ should be punished. And how do we decide who is right and wrong? Well, by looking at their positions in league tables and whether they have beaten specific, actuarially created indices.

This of course spawns an industry of monitoring who is right and who is wrong, as well as the opportunity to commentate on it. But the thing to notice here that none of the indices or league tables have anything to do with investors’ needs – they only appeal to their created wants. 

If you ever really want to understand why the investment management industry is continually lambasted for the dissatisfaction its clients feel, we only have to look at the needs/wants system and the reward/punishment regime we have set up for ourselves. At the heart of this discontent was the creation of indices to gauge fund managers against.

For this reason, I find it very difficult to celebrate, as some have in January, the 30-year anniversary of the creation of the FTSE 100 and the multitude of indices that followed.

To me it set off a chain reaction of focusing on wants rather than needs that has sown more misery and discontent amongst the people who work in finance and their clients than any benefit it could possibly have brought.

Citywire + rated Stewart Cowley runs the Citywire Selection Old Mutual Global Strategic Bond, which has returned 8.2% in three years to the end of January versus a 2.7% rise in the benchmark.  

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