Peter Bickley: Too many ignore rule one: when equities go south, start buying

That’s where we go to clear the mind and blow away the cobwebs, where rugged beauty combines seamlessly with the earnest chuffing of the finest in narrow gauge railways and wherever you look there’s a sheep ready to pass the time of day.

But while north of Penrhyndeudraeth may be pretty darned good, a week up beyond Inverness last month has recharged the batteries all the same.

However, it didn’t last long as it was straight back to the mad-house: would Greece default? Of course. Would Germany keep funding the (other) profligates? Afraid so. Will the Americans ever grow up? Doubtful. Will professional investors ever learn rule one of investment: buy low and sell high?

The world certainly felt a pretty dangerous place a few days back and it’s no surprise that investors were spooked. The stresses in the eurozone, just like the stand-off over the US budget were not new – plenty of us have had ample chance to pontificate about them before – but things were not getting any better.

What may be a tad more interesting is to consider what investors in general were doing about it. I wrote about markets in a tizzy a while ago, and what was plain to see, helped by the regular surveys of guru opinions, was that professional investors – those lads and lasses who are paid so well to manage your money – were sticking to their knitting. In other words, they are doing some really daft things.

“Value blindness” has afflicted investors in the bond markets for years – you can date it back to the infatuation with “asset/liability matching”. This was a wizard wheeze (championed by actuaries stung by the discovery that now and again equities can go down) which by allegedly eliminating risk from mainly pension fund investment made the returns so poor that schemes became unaffordable. Value blindness has matured and is now so entrenched it knows no limits.

It gets even better. A recent Reuters survey revealed that fund managers were reducing equities (and some other risk assets) to increase cash. This, apparently, is “prudent”. In most cases a better description might be “barmy”.

Of course risk assets can indeed be volatile in the short term, but only an idiot should be worried about that. Cash, on the other hand, guarantees that you lose money once inflation is taken into account, just as you do in gilts.

Meanwhile, equity opportunities were all around for those with the eyes to see them. Strongly financed companies with solid franchises and liberal cashflows are everywhere, and with secure dividend yields often double the yield on gilts or cash they are reassuringly cheap – even cheaper back then with the rush to sell.

So why are fund managers so dumb? Why do they persist in breaking rule one? Why does it make sense to them to impose the certainties of opportunity costs on their clients as a substitute for the uncertainty of potential short-term losses, especially when – as now – respective valuations are so out of kilter?

When equities have performed very badly the rational investor should surely be looking to buy them, not crystallise that performance by moving to guaranteed disappointment in the shape of cash.

The nub of the problem lies in a failure to get real. The pretence that turning defensive when markets have fallen makes sense only if judgment is collectively suspended. With yours duly sharpened, hopefully by a trip “up North”, I wish you well for your next chat with your fund manager. Especially if he tells you he turned “defensive” when markets were at their lows.

• Peter Bickley is a consultant economist