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Stewart Cowley: it's a wonderful life

by Stewart Cowley on Jan 16, 2014 at 14:05

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?

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2 comments so far. Why not have your say?

Anonymous 1 needed this 'off the record'

Jan 16, 2014 at 16:26

I always enjoy reading Stewart's pieces and this is no different, its spot on. Market cap weighted indices and peer group league tables that contain a plethora of different strategies within the same sector are an abomination. Not only do they not match investors needs, they lead fund managers to make poor decisions. How many equity managers out there have a large position in a stock for no better reason that it being a large index constituent - my guess is it runs to the 75% mark. In the case of investment grade credit funds people were running with 50-60% in financials prior to the crash, because the index had 50%. Where was the sense in that. Precisely what the solution is I am less sure. Its easy to say needs driven investing makes sense and it certainly does but there still need to be ways of judging managers. Different benchmarks, equally weighted or style driven for example, that match what a manager is attempting may be a solution but does that just lead to greater complexity? There really should be more of a debate on this as for me it is a large elephant in the corner of the investment room. Or perhaps there shouldnt!? Herd stupidity creates the opportunity for people who can think independently and creatively to do well.

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Jan 16, 2014 at 16:53

Indices are fine if you know what the limitations are. Having them is better than the prior situation anyway, even if it's all become too sophisticated. Problem is that most people do not know what they want, and cannot measure the benefits. I have been known to say to my colleagues that our clients don't know we are price competitive, but give higher service and (generally) achieve better results than our peers. Yet, it does show up, strangely, in our persistence figures...

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