Marcus Padley, of stockbroking firm Paterson Securities, in his regular column in The Age wrote a knowledgeable piece that every active and passive investor should read. The title of the article “Where brokers dare, we should tread carefully” is a two part editorial in which Marcus conveys the 10 lessons learnt by Mr Harry Hindsight.
What’s unusual in this article and several others over the past week is the ground breaking mind shift from those within the industry. Finally the unspoken truths of the financial industry are becoming exposed, highlighting the fact that the industry needs a reset.
To quote Marcus: “… the finance industry is a marketing machine… ” and “… there is uncertainty about just whose purpose half the advisory world is attempting to serve”. I whole heartedly support these statements. I have said and written similar statements in the past.
Marcus goes on to state “buy and hold is dead” (refer to my past journal posting “Death of the Buy and Hold investor”) and “… we need mechanisms outside the ramblings of the brain to protect equity investments. Unemotional triggers. We need systems and we play in markets without them at our peril”.
This is why I am so passionate about mechanical active investment and believe that the road to successful active investment is found through the mechanical way. In terms of probabilities those that follow a system that is derived from market price action have a much higher probability of success.
I have to question what is suddenly causing this rational discussion from inside the industry? A crushing bear market? Is that all it took? How fickle? For many years I felt somewhat alone in voicing my opinions about the weaknesses of the financial advisor and broking industry.
The second article written by Deirdre Macken, “Money: why we can’t handle it” conveys how we are psychologically crippled for investment, whether it is stock market, real-estate or general finance related. Deirdre points out, “More polite people will describe these dim decisions as ‘bounded rationality’ or ‘inherent biases’ but whatever you call them, science is proving the brain is not well equipped for modern finance and people who don’t realise how their humanity undermines their rationality are vulnerable to making poor decisions”. These phrases, which have been locked away in the annals of psychology books for decades (Kahneman & Tversky completed their initial research in the late 70’s), are now appearing in the daily financial press!
I can only agree with this article adding that human beings are woefully flawed, particularly when it comes to managing portfolios in the financial markets (btw, fund managers fall into the category of human beings too!).
I simply believe that the highest probability way of achieving success in the market (for an individual investor or professional money manager) is by deploying a mechanical trading system, based on price action, that has a well researched and well defined edge. The rigour, rules, structure and processes of a mechanical approach are required to overcome the human flaws and industry flaws discussed in these articles. The rules of the system need to cover market and stock timing, risk management and position sizing. Don’t leave home without one!!