Whatever your views on the merits of the UK leaving the EU, there’s one thing no one can take away from the Leave campaign: its victory in the 2016 referendum was one of the most remarkable achievements in modern political history.
The Director of Vote Leave was Dominic Cummings, now a special adviser to Boris Johnson’s new government. In an article published in The Spectator, six months after the referendum, he explained how it happened.
One of the biggest challenges, he said, was persuading the various disparate groups in favour of leaving — Eurosceptic Conservative MPs, lobby groups and so on — that victory was possible and they should pull out all the stops to achieve it.
Most of them, he recalls, wanted to win, but didn’t want it enough to give up their free time and holidays to knock on doors and win voters over.
“This lack of motivation,” he wrote, “is connected to (an) important psychology — the willingness to fail conventionally. Most people in politics are, whether they know it or not, much more comfortable with failing conventionally than risking the social stigma of behaving unconventionally. They did not mind losing so much as being embarrassed, as standing out from the crowd.”
He then said this: “The same phenomenon explains why the vast majority of active fund management destroys wealth and nobody learns from this fact repeated every year.”
Worldly wisdom
It was John Maynard Keynes who first articulated what I suppose you could call Conventional Failure Syndrome. In Chapter 12 of The General Theory, which incidentally Warren Buffett describes as required reading, he wrote: “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”
Keynes, when he wrote those words, was specifically referring to the investment management. He was an experienced investor himself, mainly on behalf of King’s College, Cambridge, of which he was the Bursar.
As an investor, Keynes was anything but conventional. For example, he favoured equities for long-term investing when most college endowments and other institutions favoured bonds. He believed in international exposure at a time when home bias was even more prevalent than it is today. Ignoring accusations of aesthetic indulgence, he also invested in paintings by the likes of Matisse, Seurat and Picasso.
Keynes learned from his failures
Keynes the investor certainly had his failures. He was all but wiped out twice — most famously in the market crashes in London and on Wall Street in 1929. But he learned from those setbacks. A study by David Chambers and Elroy Dimson from Cambridge Judge Business School shows, for instance, how he gradually gave up on trying to time the market, focussing instead on long-term investing and bottom-up stock selection.
It’s very difficult you say how Keynes would invest if he were alive today. I’m a committed indexer, but I’m not going to pretend that he didn’t believe in active management (he did), or that he considered markets to be efficient (he didn’t).
What I do feel certain of, however, is that Keynes would have had very little sympathy with today’s investing industry.
Unconventional success is risky
Asset management, in particular, is a classic example of conventional failure. Unconventional success brings a fund manager fame and riches; you only need to look at those who’ve built an entire career on one big, contrarian bet. But it’s also very risky. Get it wrong and you can be made to look a fool; you can lose your bonus and ultimately your job.
Most fund managers simply have too much to lose to be truly contrarian. So they prefer to fail conventionally and keep their well-paid jobs than assume the risks required to succeed unconventionally.
If, for example, they have a good first half of the year, they often lock in their gains by reducing their risk in the second half. Worse still, they will claim to be active managers, and charge accordingly, while quietly hugging the benchmark. For those who run them, closet trackers can’t lose; they won’t trail the index by much, but they bring in fees regardless. After costs, investors almost invariably do lose, relative to investing in a low-cost index fund.
Consultants and advisers
Nor is it just fund managers who are prone to Conventional Failure Syndrome. Investment consultants have it big time too. They’re perceived as experts by their clients, so why risk tarnishing that expertise by standing out and being made to look silly? Better, surely, to keep on recommending what you’ve always done, and everyone else does, even if you have your private doubts as to the quality of the advice you’re giving?
Most (yes, most) financial advisers are conventional failure addicts as well. In an extraordinary new book, STANDUP to the Financial Services industry, John De Goey, a portfolio manager from Toronto, claims that the majority of advisers in Canada actually cause their clients harm. They don’t mean to, he says; they just do. For example, they trade too much, pick funds based on past performance and try to time the market, and there’s academic evidence to prove it.
“It is just human nature,” De Goey says, “to go along with the crowd when virtually everyone has a consistent perspective. Independent viewpoints are hard to come by when they are met with ostracisation by peers and colleagues. This unwitting lack of independent thought gives way to ‘groupthink’. Pressure to conform means the problem never gets solved.”
Journalists aren’t immune either
Financial journalists are the same. I’m sure, deep down, that most of my colleagues realise that constantly writing about the latest investment products and focussing on short-term market movements does more to help the advertisers than the readers. But why make a fuss? That’s what the financial media does and people want to read about, isn’t it? Journalists, too, have careers and salaries to think about.
But John De Goey is dead right. Being a lemming is the easy option. But if everyone conforms, problems never get solved.
There is huge inertia and resistance to change in the UK investing industry. Yet, as the FCA’s report on its Asset Management Market Study made abundantly clear, it is riddled with problems from top to bottom. Unless more people start to challenge the status quo, and risk falling on their faces in the process, nothing much will change at all.
Extraordinary things happen
Organisations like The True and Fair Campaign and the Transparency Task Force have made a huge contribution. So too have principled politicians like Frank Field and Tom Tugendhat who’ve spoken out on the need for better consumer outcomes.
But, ultimately, we need to move on from arguing and lobbying. We need to start changing the investing industry, beginning with its culture. We need, in short, to be the change we wish to see.
Of course, we might fail. But as Vote Leave showed, extraordinary things happen when people really put their minds to it.
Picture: John Cameron via Unsplash
Robin is a journalist and campaigner for positive change in global investing. He runs Regis Media, a niche provider of content marketing for financial advice firms with an evidence-based investment philosophy. He also works as a consultant to other disruptive firms in the investing sector.
