"The bulk of the money in this world is managed in a cover-your-ass fashion."
Thus speaks a modern day Zarathustra...a prophet of the school of "behavioral finance," Mr. Whitney Tilson, fund manager, founder of T2 Partners, and Financial Times columnist. As an investment theory, behavioral finance turns out to be a full-dress version of the familiar truism about the fool and his money. What worries the behaviorists is the way investors make mistakes by following their impulses...with nary a sign of rational profit maximizing. If only the poor suckers would stick with sober investment analysis, complain the behaviorists, drumming their fingers in a nervous, academic sort of way.
Think about it. Here, an investor holds a stock too long. There, another buys a fund simply because everyone else is buying it. A third bumbler investigates so much he gets "married" to his picks, having put so much time and effort into them.
We might feel sorry for the poor fools, for we realize that we make all those "mistakes" ourselves...only, we wonder if they really are mistakes.
You see, the problem with the behavioral finance chaps is that they don't go far enough. They pretend to analyze what people do, and then compare it to what some fictional, non-existent investor "ought" to do. So, today we ask the question: Why should he? If we investors do not really invest the way a theory says we should, where is the fault? Where is the error? In ourselves...or in the theory? Why, after all, should investors behave in any other way than the one they are accustomed to?
The behaviorist professors assume that man is essentially a rational, profit-maximizing creature who simply makes "mistakes." But these "mistakes" are not mistakes. If an investor does not invest the way the professors think he should, it is because he is not the animal they think he is. In other words, we investors do not invest merely to make money.
If our only goal were to make money, we would go into pornography, illegal drugs...or even worse, hedge funds! Yes, if men were only money makers, we would go door to door in trailer parks, offering zero-down, no-interest, negative-amortization loans on new cond....er, doublewides. And we'd give a discount for buying two of them. Where we met resistance, we'd throw in a subscription to one of those nifty Internet porn sites - free, with every purchase, and maybe some crack cocaine, too...just to ease the settlement.
But the lumpen investor does not have only moneymaking as his goal. Making money is merely a part of a whole complex of desires and prejudices that drives him to his much-deserved fate. The lump wants not only to make money, you see, but also to feel both wise and hip...both daring and cautious. He is certainly willing to try contrarian investments, only so long as everyone else is, too!
And that is why in the hard world of investing, the lumps are losers. For, in investing, what tends to go up is just the thing that has gone down. But, buying down-and-out investments is not what the average investor wants to do. Why? Because it makes him feel marginalized, odd, in danger. It makes him feel like an outsider...when he wants to feel anything but. He would as soon forego his profits to pay for that privilege. In fact, the lump tosses and turns at night, unless he is firmly and squarely bedded down in the middle of the vast herd of other slumbering fools.
The lumps may not maximize their investment returns, but they judge being able to sleep well worth the cost.
Other investors don't care so much about making the right decision as they do about avoiding the wrong one. Such men fear losses less than laughter. They dread most of all being in a position where anyone - especially their wives - might point a finger and call them a jackass. To tell the truth, they would rather actually be jackasses, financially speaking, than be accused of being one by an ignoramus. And, what do you do to avoid your wife's criticism? Why, you do exactly what Citibank or Lehman Bros does. Or what the Federal Reserve Bank tells you to - even if it means taking out an adjustable rate mortgage.
Yet another lot of investors exhibits a loyalty we can only admire. They stick with an investment sector - or even an individual company - through thick or thin, rich or poor, success or failure, until death do them part. And death often does. Others tend more to be bad boyfriends, dropping their poor girls as soon as another bit of skirt wiggles in front of them.
But, of course, if you believe the behaviorist geeks, the cads are only being rational, profit maximizers. Not a whisper of spring fever in the blood at all.
But if investment decisions really were such cold-blooded, binary choices
- one clearly right, the other clearly wrong - computer programs might make them for us just as well. Only, computers don't get to read tomorrow's headlines any sooner than we do...and even a silicon chip can't tell which investments intend to go up or down.
Which means that the whole idea of a rational profit maximizer, a perfect investor who doesn't make mistakes, is so lacking in any connection to reality, we can safely classify it as a bloodless intellectual fraud.
That is why our ingenuous and irrational investor is right, after all. Knowing that the success or failure of his investments - money wise - is mostly beyond him; he goes for the non-monetary rewards: bragging rights, sound sleep, social cache, derriere covering, wife pleasing...skirt chasing.
He may be a fool to finance professors. But in the real world, he is a man.
Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.