Over the past couple of weeks we ran a series of posts by Michael Dever defining the 20 investment myths he highlighted in his book; Jackass Investing: Don’t Do it Profit From it.
The myths ranged from the obvious long equity world standards of “buy and hold investing” and “Don’t time the markets” to some of the stubborn biases against futures trading.
Dever included several insightful and amusing anecdotes regarding the irrationality of traditional investments and flawed analysis. My favorite — one I have heard before — is how people would not invest with his commodity fund because commodities are risky.
But the most compelling part of the book shows the carnage caused by subscribing to the orthodoxy of many of these myths.
I have my own anecdote in this regard and it explains part of the problem. It even produced a guffaw from investment guru Jim Rogers when I told it to him while interviewing him for his book Hot Commodities.
I told him how in an interview with an emerging commodity trading advisor (CTA) who was having some early success with a short-term stock program trading the E-mini S&P 500 that I asked the manager whether he thought his program was robust enough to apply it to a diversified group of futures markets, including physical commodities. The emerging manager told me that he would never trade anything as risky as soybeans. This from someone trading the S&P 500 and not only trading it but managing other peoples’ money.
This highlights the problem. Most brokers (and bankers for that matter) are not interested in diversification — it is just a word they use in a sales pitch — they are interested in having product to sell. In the early 2000s the E-mini S&Ps grew so much in popularity that it broke through the niche world of futures markets and became mainstream. This meant it could be marketed and sold to a broader audience and brokers and managers moved in to fill the void. Hence, folks who were uncomfortable with commodity futures because what they heard and what they were told, were comfortable with the E-minis because everyone was trading them and they jumped to the erroneous conclusion that they were safer.
In the run-up to the financial crisis there were many institutions invested in various forms of mortgage backed securities, collateralized debt obligations (CDOs) and other new-fangled and popular investment products who were restricted from trading futures. Think of that: they would not invest in a low volatility CTA but were involved with credit default swaps! Worse yet rating agencies gave these products AAA ratings. Talk about mass hysteria.
It is not a surprise that someone can be ignorant enough to believe the S&PS are less risky than soybeans but it was troubling that someone managing other peoples’ money in the futures world could be this ignorant.