You can be wrong in company; that’s okay. For example, every single CEO of, say, the 30 largest ﬁnancial companies failed to see the housing bust coming and the inevitable crisis that would follow it. Naturally enough, “Nobody saw it coming!” was their cry, although we knew 30 or so strategists, economists, letter writers, and so on who all saw it coming. But in general, those who danced off the cliff had enough company that, if they didn’t commit other large errors, they were safe; missing the pending crisis was far from a sufﬁcient reason for getting ﬁred, apparently. Keynes had it right: “A sound banker, alas, is not one who foresees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him.” So, what you have to do is look around and see what the other guy is doing and, if you want to be successful, just beat him to the draw. Be quicker and slicker. And if everyone is looking at everybody else to see what’s going on to minimize their career risk, then we are going to have herding. We are all going to surge in one direction, and then we are all going to surge in the other direction. We are going to generate substantial momentum, which is measurable in every ﬁnancial asset class, and has been so forever. Sometimes the periodicity of the momentum shifts, but it’s always there. It’s the single largest inefﬁciency in the market. There are plenty of inefﬁciencies, probably hundreds. But the overwhelmingly biggest one is momentum (created through a perfectly rational reason, Paul Woolley would say): acting to keep your job is rational. But it doesn’t create an efﬁcient market. In fact, in many ways this herding can be inefﬁcient, even dysfunctional.Go, read ...
Wednesday, January 26, 2011
Bankers Are Managing Their Careers, Not Their Clients' Risk
Another MUST READ by Jeremy Grantham of GMO yesterday. There is a lot more, but assuming my obsession with bankers, also very recently, I would highlight the following: