The Americans are busily searching for the culprits of the financial meltdown and the SEC, FBI and others are beating the bushes, but in the UK the heads of the Bank of England, the FSA and the Government make speeches - various people from the Bank of England and the FSA are moving on, but it is safe to predict that no one will be found to be responsible except, of course, the bankers and hedge funds. It is fortunate for them that burning at the stake is out of fashion.
Lloyd's of London has had some experience of failed regulation and after the failure to recognize the imbecilic behaviour of a lunatic fringe, major reconstruction became necessary (without any contribution from the taxpayer). After this near death experience Lloyd's passed hundreds of new regulations and imported herds of regulators - there were more at Lloyd's than were considered necessary for the rest of the UK insurance industry - with dire consequences. The market again sustained many billions of losses but since corporate capital had arrived and the losses were overwhelmingly sustained by this capital rather than the Names, it did not attract much notice However, it was obvious that the legions of regulators were ineffectual and the missing key component was knowledge, which was in short supply, not power, which they had in abundance.
The current Franchise Board at Lloyd’s was created in response to this so that now regulation is firmly practitioner led. The Franchise Board came to power in a fast improving market environment but the current signs are promising: it has the power and the knowledge.
It is not clear that the Bank of England or the FSA really understood the nature of the risks which financial institutions were accepting or, if they did, that they had any clue what to do about them. The new regulations and armies of new regulators which will arrive on the scene as a response to current events will be similarly handicapped. Unless the regulators are really up to speed with what the markets are doing they will prove to be as ineffectual as before.
History – In 1929 the Willcox Syndicate at Lloyd’s insured the solvency of secondhand car dealers – with predictable results. Lloyd’s, thereafter, insisted that all businesses operating in Lloyd’s should agree not to accept Financial Guarantee risks. This interdiction has been slightly modified since but is still in force – some people do learn from history.
Showing posts with label financial instruments. Show all posts
Showing posts with label financial instruments. Show all posts
Tuesday, 21 October 2008
Monday, 20 October 2008
Thou shalt not underwrite financial instruments
A very knowledgeable friend remarked last week that ever since the 1920's when one Lloyd's syndicate caught a severe cold insuring some financial instruments which went badly wrong ,not to underwrite such has been one of the commandments which all Lloyd's underwriters must very consciously obey.
Thursday, 9 October 2008
High Impact, low probability risk
For more than 10 years the Council of the Association of Insurance and Risk Managers ( AIRMIC) have insisted that their reserves be placed with three separate banks, despite their lead bank offering significantly better interest rates. An example of risk managing for what, for the last ten years, would have been seen as a high impact but low probability risk.
Wednesday, 1 October 2008
Spreading the risk
Here's a risk management story from Tom Cahill's report on Bloomberg today;
"John James, who runs the Chicago-based firm with $25 million of assets, didn't buy Lehman stock or debt. Instead, his potentially fatal mistake was to rely on the bank's prime brokerage in London, a unit that provides loans, clears trades and handles administrative chores for hedge funds. He's one of dozens of investment managers whose Lehman prime-brokerage accounts were frozen when the company filed for protection from creditors on Sept. 15. "
Never rely on just one provider, if you can help it.
"John James, who runs the Chicago-based firm with $25 million of assets, didn't buy Lehman stock or debt. Instead, his potentially fatal mistake was to rely on the bank's prime brokerage in London, a unit that provides loans, clears trades and handles administrative chores for hedge funds. He's one of dozens of investment managers whose Lehman prime-brokerage accounts were frozen when the company filed for protection from creditors on Sept. 15. "
Never rely on just one provider, if you can help it.
Monday, 29 September 2008
Pass the radioactive parcel
The ATCA thought piece today quoted the world derivatives' market at $1.14 quadrillion ( that a thousand trillion ) which equates to $190,000 for every person on the planet or 22 times the global GDP.
The unravelling ( unwinding seems far too controlled a word) of such a large market which is based on nothing more than confidence starts to look like a radioactive version of pass the parcel, whereby everyone involved is blighted. Don't expect your $190,000 soon.
The unravelling ( unwinding seems far too controlled a word) of such a large market which is based on nothing more than confidence starts to look like a radioactive version of pass the parcel, whereby everyone involved is blighted. Don't expect your $190,000 soon.
Monday, 22 September 2008
Wholely right
The following extract from Berkshire Hathaway's 2002 Annual Letter to Shareholders deserves the widest possible circulation. Warren Buffett should be required reading for all in the risk business. I have not abbreviated the extract - you need to read the whole section.
Derivatives
Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with them: We view them as time bombs, both for the parties that deal in them and the economic system.
Having delivered that thought, which I’ll get back to, let me retreat to explaining derivatives, though the explanation must be general because the word covers an extraordinarily wide range of financial contracts.
Essentially, these instruments call for money to change hands at some future date, with the amount to be determined by one or more reference items, such as interest rates, stock prices or currency values. If, for example, you are either long or short an S&P 500 futures contract, you are a party to a very simple derivatives transaction – with your gain or loss derived from movements in the index. Derivatives contracts are of varying duration (running sometimes to 20 or more years) and their value is often tied to several variables.
Unless derivatives contracts are collateralized or guaranteed, their ultimate value also depends on the creditworthiness of the counterparties to them. In the meantime, though, before a contract is settled, the counterparties record profits and losses – often huge in amount – in their current earnings statements without so much as a penny changing hands.
The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it
seems, madmen). At Enron, for example, newsprint and broadband derivatives, due to be settled many years in the future, were put on the books. Or say you want to write a contract speculating on the number of twins to be born in Nebraska in 2020. No problem – at a price, you will easily find an obliging counterparty.
When we purchased Gen Re, it came with General Re Securities, a derivatives dealer that Charlie and I didn’t want, judging it to be dangerous. We failed in our attempts to sell the operation, however, and are now terminating it.
But closing down a derivatives business is easier said than done. It will be a great many years before we are totally out of this operation (though we reduce our exposure daily). In fact, the reinsurance and derivatives businesses are similar: Like Hell, both are easy to enter and almost impossible to exit. In either industry, once you write a contract – which may require a large payment decades later – you are usually stuck with it. True, there are methods by which the risk can be laid off with others. But most strategies of that kind leave you with residual liability.
Another commonality of reinsurance and derivatives is that both generate reported earnings that are often wildly overstated. That’s true because today’s earnings are in a significant way based on estimates whose inaccuracy may not be exposed for many years.
Errors will usually be honest, reflecting only the human tendency to take an optimistic view of one’s commitments. But the parties to derivatives also have enormous incentives to cheat in accounting for them.
Those who trade derivatives are usually paid (in whole or part) on “earnings” calculated by mark-to-market accounting. But often there is no real market (think about our contract involving twins) and “mark-to-model” is utilized. This substitution can bring on large-scale mischief. As a general rule, contracts involving multiple reference items and distant settlement dates increase the opportunities for counterparties to use fanciful assumptions. In the twins scenario, for example, the two parties to the contract might well use differing models allowing both to show substantial profits for many years. In extreme cases, mark-to-model degenerates into what I would call mark-to-myth.
Of course, both internal and outside auditors review the numbers, but that’s no easy job. For
example, General Re Securities at yearend (after ten months of winding down its operation) had 14,384 contracts outstanding, involving 672 counterparties around the world. Each contract had a plus or minus value derived from one or more reference items, including some of mind-boggling complexity. Valuing a portfolio like that, expert auditors could easily and honestly have widely varying opinions.
The valuation problem is far from academic: In recent years, some huge-scale frauds and near-frauds have been facilitated by derivatives trades. In the energy and electric utility sectors, for example, companies used derivatives and trading activities to report great “earnings” – until the roof fell in when they actually tried to convert the derivatives-related receivables on their balance sheets into cash. “Mark-to-market” then turned out to be truly “mark-to-myth.”
I can assure you that the marking errors in the derivatives business have not been symmetrical.
Almost invariably, they have favored either the trader who was eyeing a multi-million dollar bonus or the CEO who wanted to report impressive “earnings” (or both). The bonuses were paid, and the CEO profited from his options. Only much later did shareholders learn that the reported earnings were a sham.
Another problem about derivatives is that they can exacerbate trouble that a corporation has run into for completely unrelated reasons. This pile-on effect occurs because many derivatives contracts require that a company suffering a credit downgrade immediately supply collateral to counterparties. Imagine, then, that a company is downgraded because of general adversity and that its derivatives instantly kick in with their requirement, imposing an unexpected and enormous demand for cash collateral on the company. The need to meet this demand can then throw the company into a liquidity crisis that may, in some cases, trigger still more downgrades. It all becomes a spiral that can lead to a corporate meltdown.
Derivatives also create a daisy-chain risk that is akin to the risk run by insurers or reinsurers that lay off much of their business with others. In both cases, huge receivables from many counterparties tend to build up over time. (At Gen Re Securities, we still have $6.5 billion of receivables, though we’ve been in a liquidation mode for nearly a year.) A participant may see himself as prudent, believing his large credit exposures to be diversified and therefore not dangerous. Under certain circumstances, though, an exogenous event that causes the receivable from Company A to go bad will also affect those from Companies B through Z. History teaches us that a crisis often causes problems to correlate in a manner undreamed of in more tranquil times.
In banking, the recognition of a “linkage” problem was one of the reasons for the formation of the
Federal Reserve System. Before the Fed was established, the failure of weak banks would sometimes put sudden and unanticipated liquidity demands on previously-strong banks, causing them to fail in turn. The Fed now insulates the strong from the troubles of the weak. But there is no central bank assigned to the job of preventing the dominoes toppling in insurance or derivatives. In these industries, firms that are
fundamentally solid can become troubled simply because of the travails of other firms further down the chain. When a “chain reaction” threat exists within an industry, it pays to minimize links of any kind. That’s how we conduct our reinsurance business, and it’s one reason we are exiting derivatives.
Many people argue that derivatives reduce systemic problems, in that participants who can’t bear certain risks are able to transfer them to stronger hands. These people believe that derivatives act to stabilize the economy, facilitate trade, and eliminate bumps for individual participants. And, on a micro level, what they say is often true. Indeed, at Berkshire, I sometimes engage in large-scale derivatives transactions in order to facilitate certain investment strategies.
Charlie and I believe, however, that the macro picture is dangerous and getting more so. Large
amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one other. The troubles of one could quickly infect the others.
On top of that, these dealers are owed huge amounts by non-dealer counterparties. Some of these counterparties, as I’ve mentioned, are linked in ways that could cause them to contemporaneously run into a problem because of a single event (such as the implosion of the telecom industry or the precipitous decline in the value of merchant power projects). Linkage, when it suddenly surfaces, can trigger serious systemic problems.
Indeed, in 1998, the leveraged and derivatives-heavy activities of a single hedge fund, Long-Term Capital Management, caused the Federal Reserve anxieties so severe that it hastily orchestrated a rescue effort. In later Congressional testimony, Fed officials acknowledged that, had they not intervened, the outstanding trades of LTCM – a firm unknown to the general public and employing only a few hundred people – could well have posed a serious threat to the stability of American markets. In other words, the Fed acted because its leaders were fearful of what might have happened to other financial institutions had the LTCM domino toppled. And this affair, though it paralyzed many parts of the fixed-income market forweeks, was far from a worst-case scenario.
One of the derivatives instruments that LTCM used was total-return swaps, contracts that facilitate 100% leverage in various markets, including stocks. For example, Party A to a contract, usually a bank, puts up all of the money for the purchase of a stock while Party B, without putting up any capital, agrees that at a future date it will receive any gain or pay any loss that the bank realizes.
Total-return swaps of this type make a joke of margin requirements. Beyond that, other types of
derivatives severely curtail the ability of regulators to curb leverage and generally get their arms around the risk profiles of banks, insurers and other financial institutions. Similarly, even experienced investors and analysts encounter major problems in analyzing the financial condition of firms that are heavily involved with derivatives contracts. When Charlie and I finish reading the long footnotes detailing the derivatives activitiesof major banks, the only thing we understand is that we don’t understand how much risk the institution isrunning.
The derivatives genie is now well out of the bottle, and these instruments will almost certainly
multiply in variety and number until some event makes their toxicity clear. Knowledge of how dangerousthey are has already permeated the electricity and gas businesses, in which the eruption of major troublescaused the use of derivatives to diminish dramatically. Elsewhere, however, the derivatives businesscontinues to expand unchecked. Central banks and governments have so far found no effective way tocontrol, or even monitor, the risks posed by these contracts.
Charlie and I believe Berkshire should be a fortress of financial strength – for the sake of our
owners, creditors, policyholders and employees. We try to be alert to any sort of megacatastrophe risk, andthat posture may make us unduly apprehensive about the burgeoning quantities of long-term derivativescontracts and the massive amount of uncollateralized receivables that are growing alongside. In our view,however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.
Derivatives
Charlie and I are of one mind in how we feel about derivatives and the trading activities that go with them: We view them as time bombs, both for the parties that deal in them and the economic system.
Having delivered that thought, which I’ll get back to, let me retreat to explaining derivatives, though the explanation must be general because the word covers an extraordinarily wide range of financial contracts.
Essentially, these instruments call for money to change hands at some future date, with the amount to be determined by one or more reference items, such as interest rates, stock prices or currency values. If, for example, you are either long or short an S&P 500 futures contract, you are a party to a very simple derivatives transaction – with your gain or loss derived from movements in the index. Derivatives contracts are of varying duration (running sometimes to 20 or more years) and their value is often tied to several variables.
Unless derivatives contracts are collateralized or guaranteed, their ultimate value also depends on the creditworthiness of the counterparties to them. In the meantime, though, before a contract is settled, the counterparties record profits and losses – often huge in amount – in their current earnings statements without so much as a penny changing hands.
The range of derivatives contracts is limited only by the imagination of man (or sometimes, so it
seems, madmen). At Enron, for example, newsprint and broadband derivatives, due to be settled many years in the future, were put on the books. Or say you want to write a contract speculating on the number of twins to be born in Nebraska in 2020. No problem – at a price, you will easily find an obliging counterparty.
When we purchased Gen Re, it came with General Re Securities, a derivatives dealer that Charlie and I didn’t want, judging it to be dangerous. We failed in our attempts to sell the operation, however, and are now terminating it.
But closing down a derivatives business is easier said than done. It will be a great many years before we are totally out of this operation (though we reduce our exposure daily). In fact, the reinsurance and derivatives businesses are similar: Like Hell, both are easy to enter and almost impossible to exit. In either industry, once you write a contract – which may require a large payment decades later – you are usually stuck with it. True, there are methods by which the risk can be laid off with others. But most strategies of that kind leave you with residual liability.
Another commonality of reinsurance and derivatives is that both generate reported earnings that are often wildly overstated. That’s true because today’s earnings are in a significant way based on estimates whose inaccuracy may not be exposed for many years.
Errors will usually be honest, reflecting only the human tendency to take an optimistic view of one’s commitments. But the parties to derivatives also have enormous incentives to cheat in accounting for them.
Those who trade derivatives are usually paid (in whole or part) on “earnings” calculated by mark-to-market accounting. But often there is no real market (think about our contract involving twins) and “mark-to-model” is utilized. This substitution can bring on large-scale mischief. As a general rule, contracts involving multiple reference items and distant settlement dates increase the opportunities for counterparties to use fanciful assumptions. In the twins scenario, for example, the two parties to the contract might well use differing models allowing both to show substantial profits for many years. In extreme cases, mark-to-model degenerates into what I would call mark-to-myth.
Of course, both internal and outside auditors review the numbers, but that’s no easy job. For
example, General Re Securities at yearend (after ten months of winding down its operation) had 14,384 contracts outstanding, involving 672 counterparties around the world. Each contract had a plus or minus value derived from one or more reference items, including some of mind-boggling complexity. Valuing a portfolio like that, expert auditors could easily and honestly have widely varying opinions.
The valuation problem is far from academic: In recent years, some huge-scale frauds and near-frauds have been facilitated by derivatives trades. In the energy and electric utility sectors, for example, companies used derivatives and trading activities to report great “earnings” – until the roof fell in when they actually tried to convert the derivatives-related receivables on their balance sheets into cash. “Mark-to-market” then turned out to be truly “mark-to-myth.”
I can assure you that the marking errors in the derivatives business have not been symmetrical.
Almost invariably, they have favored either the trader who was eyeing a multi-million dollar bonus or the CEO who wanted to report impressive “earnings” (or both). The bonuses were paid, and the CEO profited from his options. Only much later did shareholders learn that the reported earnings were a sham.
Another problem about derivatives is that they can exacerbate trouble that a corporation has run into for completely unrelated reasons. This pile-on effect occurs because many derivatives contracts require that a company suffering a credit downgrade immediately supply collateral to counterparties. Imagine, then, that a company is downgraded because of general adversity and that its derivatives instantly kick in with their requirement, imposing an unexpected and enormous demand for cash collateral on the company. The need to meet this demand can then throw the company into a liquidity crisis that may, in some cases, trigger still more downgrades. It all becomes a spiral that can lead to a corporate meltdown.
Derivatives also create a daisy-chain risk that is akin to the risk run by insurers or reinsurers that lay off much of their business with others. In both cases, huge receivables from many counterparties tend to build up over time. (At Gen Re Securities, we still have $6.5 billion of receivables, though we’ve been in a liquidation mode for nearly a year.) A participant may see himself as prudent, believing his large credit exposures to be diversified and therefore not dangerous. Under certain circumstances, though, an exogenous event that causes the receivable from Company A to go bad will also affect those from Companies B through Z. History teaches us that a crisis often causes problems to correlate in a manner undreamed of in more tranquil times.
In banking, the recognition of a “linkage” problem was one of the reasons for the formation of the
Federal Reserve System. Before the Fed was established, the failure of weak banks would sometimes put sudden and unanticipated liquidity demands on previously-strong banks, causing them to fail in turn. The Fed now insulates the strong from the troubles of the weak. But there is no central bank assigned to the job of preventing the dominoes toppling in insurance or derivatives. In these industries, firms that are
fundamentally solid can become troubled simply because of the travails of other firms further down the chain. When a “chain reaction” threat exists within an industry, it pays to minimize links of any kind. That’s how we conduct our reinsurance business, and it’s one reason we are exiting derivatives.
Many people argue that derivatives reduce systemic problems, in that participants who can’t bear certain risks are able to transfer them to stronger hands. These people believe that derivatives act to stabilize the economy, facilitate trade, and eliminate bumps for individual participants. And, on a micro level, what they say is often true. Indeed, at Berkshire, I sometimes engage in large-scale derivatives transactions in order to facilitate certain investment strategies.
Charlie and I believe, however, that the macro picture is dangerous and getting more so. Large
amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers, who in addition trade extensively with one other. The troubles of one could quickly infect the others.
On top of that, these dealers are owed huge amounts by non-dealer counterparties. Some of these counterparties, as I’ve mentioned, are linked in ways that could cause them to contemporaneously run into a problem because of a single event (such as the implosion of the telecom industry or the precipitous decline in the value of merchant power projects). Linkage, when it suddenly surfaces, can trigger serious systemic problems.
Indeed, in 1998, the leveraged and derivatives-heavy activities of a single hedge fund, Long-Term Capital Management, caused the Federal Reserve anxieties so severe that it hastily orchestrated a rescue effort. In later Congressional testimony, Fed officials acknowledged that, had they not intervened, the outstanding trades of LTCM – a firm unknown to the general public and employing only a few hundred people – could well have posed a serious threat to the stability of American markets. In other words, the Fed acted because its leaders were fearful of what might have happened to other financial institutions had the LTCM domino toppled. And this affair, though it paralyzed many parts of the fixed-income market forweeks, was far from a worst-case scenario.
One of the derivatives instruments that LTCM used was total-return swaps, contracts that facilitate 100% leverage in various markets, including stocks. For example, Party A to a contract, usually a bank, puts up all of the money for the purchase of a stock while Party B, without putting up any capital, agrees that at a future date it will receive any gain or pay any loss that the bank realizes.
Total-return swaps of this type make a joke of margin requirements. Beyond that, other types of
derivatives severely curtail the ability of regulators to curb leverage and generally get their arms around the risk profiles of banks, insurers and other financial institutions. Similarly, even experienced investors and analysts encounter major problems in analyzing the financial condition of firms that are heavily involved with derivatives contracts. When Charlie and I finish reading the long footnotes detailing the derivatives activitiesof major banks, the only thing we understand is that we don’t understand how much risk the institution isrunning.
The derivatives genie is now well out of the bottle, and these instruments will almost certainly
multiply in variety and number until some event makes their toxicity clear. Knowledge of how dangerousthey are has already permeated the electricity and gas businesses, in which the eruption of major troublescaused the use of derivatives to diminish dramatically. Elsewhere, however, the derivatives businesscontinues to expand unchecked. Central banks and governments have so far found no effective way tocontrol, or even monitor, the risks posed by these contracts.
Charlie and I believe Berkshire should be a fortress of financial strength – for the sake of our
owners, creditors, policyholders and employees. We try to be alert to any sort of megacatastrophe risk, andthat posture may make us unduly apprehensive about the burgeoning quantities of long-term derivativescontracts and the massive amount of uncollateralized receivables that are growing alongside. In our view,however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.
Wednesday, 6 August 2008
Sounds familiar
Compare and contrast -
"It is clear that there has been a mispricing of risk.The Market did not understand the value or importance of liquidity and some banks did not fully understand some of the instruments they were dealing in."
Mervyn Davies, Chairman of Standard Chartered this week.
" A board that does not understand the strategy may not appreciate the risks, and if it does not appreciate the risks it will probably not ask the right questions to ensure the strategy is properly executed."
Justice Neville Owen in his summing up during the HIH bankruptcy case.
"It is clear that there has been a mispricing of risk.The Market did not understand the value or importance of liquidity and some banks did not fully understand some of the instruments they were dealing in."
Mervyn Davies, Chairman of Standard Chartered this week.
" A board that does not understand the strategy may not appreciate the risks, and if it does not appreciate the risks it will probably not ask the right questions to ensure the strategy is properly executed."
Justice Neville Owen in his summing up during the HIH bankruptcy case.
Wednesday, 11 June 2008
Sir Howard and the Toxic Products
Anthony Hilton in his City Comment column in the Evening Standard on Monday June 9th 2008 pointed out that the authorities were not unaware of what the bankers have been up to over the last few years and that Sir Howard Davies, when head of the FSA, delivered a speech in which "he clearly and explicitly warned about the invention of collaterised debt loan obligations and credit default swaps and described them as toxic."
He went on to say " Nor did you have to attend the dinner to hear the speech. His remarks were reported in this column".
In fact it wasn't a dinner it was the AIRMIC Lecture of January 29th 2002 at the RAC Club. Go to the link below for Roger Miller's report and the quotes on the second page in italics.
http://www.riskrisk.com/howard-davies-comments-feb02.pdf
Anthony Hilton points out that nothing the FSA could have done would have prevented the current turmoil, the bankers were uninclined to listen and quite capable of moving to more compliant regimes if the FSA had attempted to rein them in.
How we got Sir Howard to speak I will leave for another blog.
He went on to say " Nor did you have to attend the dinner to hear the speech. His remarks were reported in this column".
In fact it wasn't a dinner it was the AIRMIC Lecture of January 29th 2002 at the RAC Club. Go to the link below for Roger Miller's report and the quotes on the second page in italics.
http://www.riskrisk.com/howard-davies-comments-feb02.pdf
Anthony Hilton points out that nothing the FSA could have done would have prevented the current turmoil, the bankers were uninclined to listen and quite capable of moving to more compliant regimes if the FSA had attempted to rein them in.
How we got Sir Howard to speak I will leave for another blog.
Monday, 17 March 2008
Risk Management can never be perfect
The title of this blog comes from Alan Greenspan's article in today's Financial Times. He is referring, in particular, to the exercised state of the financial markets. He points out that the risk management models do not adequately account for human nature, in one of its manifestations he referred to "irrational exuberance" when he was Chairman of the Fed. Now he considers that "paradoxically,to the extent risk management succeeds in indentifying such episodes,it can prolong and enlarge the period of euphoria."
By which I guess he means that people rely on risk management methodology too much and that, only when it is proven inadequate, such as now, does fear replace euphoria and greed.
By which I guess he means that people rely on risk management methodology too much and that, only when it is proven inadequate, such as now, does fear replace euphoria and greed.
Friday, 14 March 2008
Timing is all
Keynes said "In the long run we are all dead." He also observed " wordly wisdom teaches it is better to fail conventionally than it is to succeed unconventionally."
It is that second quote that is mentioned in today's Telegraph obituary of Tony Dye , the Phillips and Drew Fund Manager. Dye was a contrarian who in 1996 considered the FTSE 100 overvalued at 4000 and took a sizeable part of his clients' money out of the market. In March 2000 when the index stood at 6400 he was fired , yet within a month of his leaving the stock market turned. Many of those fund managers who had followed the herd kept their jobs.
Dye's story indicates the importance of timing in risk management. If he had made the switch out of equities in January 2000 he would have been hailed as one of the greatest fund managers of all time. He was right that the market would fall, but completely out on his timing, partly because he underestimated the power of Alan Greenspan to support irrational exuberance whilst at the same time fulminating against it.
There is nothing intrinsically wrong with going with the herd although it is always worth remembering that the Gadarene swine thought the going was good for the first part of the way . Warren Buffett always reckons it is best to fearful when others are greedy and greedy when others are fearful and as for timing, Bernard Baruch said "I have made my fortune by buying too late and selling too early".
It is that second quote that is mentioned in today's Telegraph obituary of Tony Dye , the Phillips and Drew Fund Manager. Dye was a contrarian who in 1996 considered the FTSE 100 overvalued at 4000 and took a sizeable part of his clients' money out of the market. In March 2000 when the index stood at 6400 he was fired , yet within a month of his leaving the stock market turned. Many of those fund managers who had followed the herd kept their jobs.
Dye's story indicates the importance of timing in risk management. If he had made the switch out of equities in January 2000 he would have been hailed as one of the greatest fund managers of all time. He was right that the market would fall, but completely out on his timing, partly because he underestimated the power of Alan Greenspan to support irrational exuberance whilst at the same time fulminating against it.
There is nothing intrinsically wrong with going with the herd although it is always worth remembering that the Gadarene swine thought the going was good for the first part of the way . Warren Buffett always reckons it is best to fearful when others are greedy and greedy when others are fearful and as for timing, Bernard Baruch said "I have made my fortune by buying too late and selling too early".
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