Sweat The Small Stuff

I enjoyed a great conversation with the Renegade Economist on Thursday. On the humorous side, it reminded me that:

"Among the maxims on Lord Naoshige's wall, there was this one: "Matters of great concern should be treated lightly." Master Ittei commented, "Matters of small concern should be treated seriously." Ghost Dog (previously cited here).

But, seriously, it's stunning how little of the detail is really understood by our institutions. Instead, they are obsessed with erecting grand schemes that are shaped most by surprise events beyond our control - 'black swans'. These grand schemes, like the 'single market' and the Euro, are brittle political constructs that neither minimise our exposure to the downside of surprise events nor maximise our exposure to the upside. Worse, they distract us from coping with structures that emerge organically outside the artificial regulated sphere as well as day-to-day outcomes that we might otherwise have avoided within it. It was typically five years too late before any financial regulator demonstrated any understanding of the shadow banking system lurking outside the walls, for example. And our regulated financial system has suffered from within due to poor due diligence on sub-prime debt, lack of scepticism amongst auditors, analysts who rarely say 'sell', banks who are fined millions for lax controls, and tax incentives that concentrate investors' risk and fail to deliver finance to creditworthy people and businesses.

Retail is detail, they say, but so is everything else. We need to align our tax and regulatory system with our actual or desired end-to-end activities, bottom-up, rather than with artificial, paternalistic institutional visions for the future.


Image from Core77.

Analyse This

Auditors, and others interested in the nature of scepticism (feel the irony) will have been interested in recent FT coverage of stock market analysts' reluctance to write "sell" notes on the companies they cover.

In theory, the distribution of sell, hold and buy ratings should be equal. Yet Bloomberg found that 60% of analysts' ratings are "buy", and "buy"/"hold" ratings together outnumber "sell" notes by 9 to 1.

One chief of US equity strategy was brave enough to be quoted as saying, "There is clearly a lack of willingness of management to deal with analysts who are highly critical."

McKinsey research, discussed here, has also found that analysts are "typically overoptimistic, slow to revise their forecasts to reflect new economic conditions, and prone to making increasingly inaccurate forecasts when economic growth declined."

It seems likely to be self-defeating to obviously exclude or limit critical analysts' participation in briefings - possibly a sell signal in itself. Or at least a signal that everyone should start asking a lot more questions. But ultimately the research highlights the fact that, for all the law on disclosure and directors duties, the stock market is just that - a sales forum.

Let the buyer beware.