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The article below originally appears in Financial Mail's supplement Fund Management (7 March 2008)

At the start of 2008, sentiment amongst equity investors is skittish. Whilst the source of this anxiety can be traced back to the subprime crisis in the US, a cocktail of factors has emerged since the middle part of last year that has cast shadows on the outlook for company profits, rendering equities less attractive.

This article draws heavily on a note first published by Chris Ng in the National Post, titled Sticking to the Rules; edits have been made throughout to bring the content into the South African setting.


The evidence from the world of investment finance points to a number of straightforward, but important, results for investors. First, most fund managers fail to beat the index. Second, most investors do even worse than this because they trade fund managers and try to time the market.

“Fear and panic give poor counsel.” 
Jürgen Stark, European Central Bank

Recent market volatility has presented investors with a minefield, and volatility has meant that many weak hands have capitulated and exiting the market, whilst some – especially investors with geared portfolios – have been carried form the market.

Against this backdrop, in the article below, Seth Klarman makes the point that most investors lack a strategy that equips them to deal with a rise in volatility and declining markets. Momentum investors become lost when the momentum wanes, and growth investors lose direction when expected growth fails to materialise.

If you want to go through life like a one legged man in an ass-kicking contest, why be my guest. But if you want to succeed, like a strong man with two legs, you have to pick up these tricks, including doing economics while knowing psychology.

Charles T. Munger (Vice Chairman, Berkshire Hathaway) 


Someone will call
Something will fall
And smash on the floor
Without reading the text
Know what comes next
Seen it before
And it's painful
Things must change
We must rearrange them


The Economist (Keeping Shareholders in Their Place) recently outlined the complaint made by shareholders that, increasingly, they have been stripped of their ability to 'be active'.

I find this stance questionable.

As I pointed out in a letter (Share Options) to the same newspaper, in adopting this stance, active investors have lost sight of the wood for the trees.

In 1976 the Financial Analysts Journal published an interview with Benjamin Graham, the father of value investing.

The interview, reproduced below, is rich in illustrations, arguments and evidence that relate to the world of active investment management. For instance, Graham describes the stock market as "a huge laundry in which institutions take in each other's washing ... without true rhyme or reason".

Historically, equities constitute the top performing global asset class. However, the available evidence shows that most active investors are unable to achieve similar returns. To the contrary, a wide body of evidence shows that the market beats about three-quarters of professional fund managers over reasonable investment periods. This is an unfortunate and expensive result for investors and an indictment of active portfolio management.

Despite this result, the case can be made for active management by recognising that not all managers are beaten by the market.

I have two children, a daughter, Sydney-Bo who will be five on her next birthday, and a baby boy, Saxon, who recently turned one. I consider fatherhood to be the most rewarding investment I have ever made, not only for the pleasure that it brings, but also the challenges it sets and the lessons it has taught me.

A little while back I was chatting with my daughter one evening when she raised the topic of my career in asset management. “What do you do at work, daddy?” she asked.