Professional Investor

“Not everything needs to be
thrown out by any means, but
many aspects of today’s best
practice need to be critically
re-examined” BROWN
Should investors look towards new
theories or adapt their application of
existing schools of thought?
BROWN – Investors do need to learn from
the markets and in particular the roller
coaster ride of the past 10 years. Not
everything needs to be thrown out by any
means, but many aspects of today’s best
practice need to be critically re-
examined. Do investors, institutional or
individual, really want raw beta? Should
strategic asset allocation be fundamentally
re-thought? Do we need to recognise that
in almost every decade returns from risky
assets deviate wildly from the kind of
equilibrium return assumptions used in
©AMIR BAHADORI
static, strategic asset-allocation models?
I believe that we need to be much
When we see something oﬀ ered in a shop 25% oﬀ in a sale, we feel more dynamic and form a judgement as
good about it. But we don’t feel good when our favourite share or market to whether the period ahead (fi ve to 10
is oﬀ ered to us 25% cheaper than yesterday. Th at’s interesting. years) is likely to lead to above- or
It reveals that investors are not buying securities with a Graham and below-average returns from risky assets. I
Dodd mentality of participating in growing earnings and dividend streams don’t think we can duck that question
(in which case, being able to buy into dividends at lower prices should any longer and live in a benchmark-
surely be regarded as unambiguously good). Instead they are buying with relative world. Absolute returns matter.
the hope of selling them on at higher prices to a ‘greater fool’.
IBBOTSON – Investors are looking at
IBBOTSON – Of course it is a simplifi cation of markets. It assumes that new theories. One set of new theories is
prices are fair and refl ect current values. Investors always look beyond in the area of behavioural fi nance.
that and investors, in their attempt to fi nd mis-priced securities in the Behavioural fi nance focuses on the
market, remove some of these mis-pricings and push the market irrationality of investors and markets. It
towards eﬃ ciency. looks at the systematic misbehaviours
Although it’s a simplifi cation, it is a useful simplifi cation. Of course, of some investors which can then be
you have to look beyond the EMH to understand many of the subtleties exploited by more intelligent investors.
of how markets behave.
BERNSTEIN – Investors should always be
BERNSTEIN – Like any valid scientifi c hypothesis, it’s a falsifi able model. It evaluating alternative hypotheses. Other
is most defi nitely not a description of reality. To the extent that it mirrors than that, this question is way above my
reality, it’s useful. pay grade.
18 SUMMER 2009
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