Saturday, 14 January 2017

Understanding these changes in the investment world allows investors to earn superior returns

The changing scenario in the investment world

The investment world has changed over the last several decades.

From 1950 to 1990, the institutional share of the market rose from 8% to 45%.

During the same period, institutions comprise 75% of market trading volume. 

The short-term mindset of the institutional investors

The institutions are hampered by a short-term mindset.  

Here are some reasons.

1.   Money managers tend to be rewarded not on what they return to clients, but rather as a percentage of their assets under management. 

A larger base of cash actually makes it more difficult to generate returns.

Thus there is a conflict between what's best for the manager and what's best for the investor.

2.   Institutional investors are also "locked into a short-term relative performance". 

Frequent comparative rankings among institutional investors forces a short-term mindset, as a long-term view can quickly send a manager to the unemployment line. 

As a result, these managers act as speculators rather than investors.

They try to guess what other managers will do, and try to do it first!

Only the brokers, who benefit from frequent trading, win this, as short-term market fluctuations are random

3.   Institutional investors are also constantly compared (and comparing themselves) to index benchmarks. 

Due to this relative comparison, they tend to prefer being close to 100% invested, even if things don't look cheap on an absolutely basis, which hurts investors when stocks are expensive.

4.  Money managers rarely invest their funds along with their clients.

In this conflict of interest situations, it is clear that the management firm wins.

Economist Paul Rosenstein:

"In the build­ing practices of ancient Rome, when scaffolding was removed from a completed Roman arch, the Roman engineer stood beneath. If the arch came crashing down, he was the first to know. Thus his concern for the quality of the arch was intensely personal, and it is not surprising that so many Roman arches have survived."

Read also:

No comments: