My mind turns today towards the volatility and performance of markets over the past couple of decades.  Volatility is a speculators delight but a business person’s nightmare.    Lack of even short term stability prevents markets from being efficient – let’s face it how can a hundred prices an hour all accurately reflect the future earning potential of that company?  Looking at some charts –you have to love Google – it is clear that volatility is increasing not reducing.  That’s interesting in itself.  We could kid ourselves that the world is becoming increasingly unstable – but it was pretty unstable in the first half of the last century – i mean those were some pretty serious wars!   No I think electronic trading and increasingly opaque instruments have allowed this to happen – oh for the days of real business and the Medici.   Not everyone is convinced that we live in a time of increasing volatility – and it matters how you measure it.  Actual movements are fairly meaningless but percentage movements and measures of SD reflect more accurately changes in the market (100 of a 5,000 sounds dramatic but is less than 25 of 1,000).  And it hits some sectors worse than others.  Somewhat ironically it is financial services themselves that are most volatile .................

As many of you know I advocate a sort of value/growth investment strategy – maybe I will blog on the tension between those two terms soon – I like playing definitions.  This approach is what I call business.  A silly expression you might say but by this I mean looking at the strategy of a business entity and the markets in which it operates and making a judgement about its ability to generate positive cashflows.  I have no time for speculation (simply a posh name for gambling) and see portfolios as a kind of obvious cop out (see earlier blog).  In amongst all of this we can look at the role of so called analysts – an interesting bread,  often seen on new shows talking as if touting on a horse race – given the glacial speed at which business operates I’m not sure what the rush is in the conversation.  Nevertheless these modern day rune readers are followed like the mystics of old.  Always interesting to see what they have been up to and always quite funny.

Simply put markets have a habit of rising over a long period.  Form 2003 to 2007 the FTSE grew by almost 100%.  In you were involved in property or the stock market before the crash and you made a fortune you had simply done nothing and if you made a ludicrous fortune perhaps you did something.  It’s not hard to make money, what is the challenge is the elusive alpha: returns over and above market growth.  The problem is many of these analysts are too close to the market, too incestuous.  By focusing on market gossip and movements they fail to see the bigger picture.  Let’s consider a recent piece in Investment News.  Here we see that only a tiny minority of advisors ever issue advice to sell.  In fact “Among 1,890 analysts tracked by Bloomberg for this story, fewer than 1% advised investors to unload a Standard & Poor's 500 stock that later showed a decline, or rose only after they upgraded it, the data show.”  Put another way only about 18 out of 1,890 actually gave the right advice!  Of course they are always right when the market rises – but as we have seen the market always rises over the long term.  For such a metric intensive industry you really would thing some better KPIs could be developed.

OK so the bank bailout was essential but now it seems they are failing in their basic function – to provide liquidity.  After receiving billions in government funds the top five banks have only managed to lend £16.8bn to small/medium companies in the first three months of 2011.  (http://www.bbc.co.uk/news/business-13489884)  Whilst this dwarfs the total equity raised on exchanges in some countries (for example the ‘record’ £777m raised in Warsaw) this simply shows the size of the UK’ economy not the dynamism of British banking.  In perspective it is £2.2bn bellow what was targeted and required – can we expect to see this KPI failure reflected in lower bonuses – I doubt it.  But what is happening in banking?  We now have Moody’s threatening a downgrade if the government does not provide additional bailouts and a far from health economy (inflation, unemployment, growth) (http://www.guardian.co.uk/business/2011/may/24/uk-banks-face-ratings-downgrade-moodys)