I’m not a natural Tory or conservative but I’ve long respected the work of Edmund Burke. It seems to me that he quite rightly reminds us that many liberals have much in common with the dreaded conservatives in that we value community, and stability especially built around the law and a skeptical way of looking at the world. Where liberals differ is a passion for more ‘progress’ whereas I suspect Burke treats our visions of progress with considerable cynicism. What we both share though is an essential skepticism about increasingly evangelical schemes that promise utopia and immediate rewards. Progress is about grinding through systems and evidence-based results to achieve material change.
This all has a resonance for me in the world of investing. In my humble opinion investing is infected with two dominant strains of thought, The first is evangelical ideas about grand systems that can explain why investments move and down. I put much of the passive fund’s community into this box along with other systemic strategy types who see order in the chaos of numbers.
On the other side of the chasm are the professional cynics, especially in the investment management community, who believe that nothing very much changes and that what comes around, goes around. Another version of this system of belief is the behaviouralists who think that everything we do and believe is hard-wired and ultimately predictable based on our known personality traits.
Sitting uncomfortably in the middle are the investors who share a more liberal interpretation of Burke’s world view but find themselves imbibed with an essential skepticism. They look for evidence-based ideas about strategies but always constantly test out the claims of progress. From this slow process of understanding one begins to build a framework of long term, patient investing.
It’s against this background that I highly recommend John Stepek’s fantastic new book, the Sceptical Investor. You can buy it online HERE.
I’m reminded reading John’s book of Adam Smith’s quote that ‘Defence is superior to opulence’ and that the smart investor isn’t especially clever or even principled but just patient, thorough and evidence-based. In chapter after chapter John carefully analyses many grand visions, unpacks them and then slowly assembles a toolkit for better investing. There is he believes – and I agree – no simple shortcuts to investing successfully. You need to listen to all of the best ideas (passive, active, systematic) and then take the bits you need.
Or as John sums it up as his three key takeaways at the very end of the book – which he suggests should be stick above your computer :
- “Nothing lasts forever: People think in straight lines, but life moves in cycles. When a trend continues for too long in one direction, the world has a habit of forcing it to revert to the mean. Both the timing and the precise nature of this reversion are unpredictable. But when asset prices become unreasonably expensive or cheap due to extrapolation, that spells opportunity for investors who can imagine a tomorrow that is different to today, and are patient enough to wait for it to arrive.
- Slow down: When it comes to investing, deploy your brain, rather than trusting your gut. Every investment you make should have a considered, well-researched rationale behind it, whether you’re a fundamental investor or a technical analyst.
- Look for the incentives: On average, when faced with a decision, an individual – be they a central banker or your next-door neighbor – will take the path of least resistance. The challenge for you, in trying to understand their behavior, lies in figuring out what they consider the path of least resistance to be.”
How to fight Corbynite nationalization
I was at an event a few weeks back and bumped into a leading PR expert for the utility industry. He seemed genuinely distressed by the great Corbyn re-nationalization movement. No matter how dismal Project Fear was portrayed in the press, the public didn’t seem interested in the woes of nationalization. “They just don’t get it – nationalizing it all won’t work”.
I am inclined to agree with this view but I think it’s a tiny bit besides the point. I’m not sure there is any congealed point of view amongst the public except that
- A lot of utilities seem to cost a great deal
- A good many of the said utilities don’t seem to be providing a better service even after the extra cost
- Anything might be better than the current shambles (railways), especially when bosses seem to be paying themselves vast salaries and dividend payouts are massive.
Even those of us implacably opposed to nationalization, struggle to argue with these points. My own personal rejoinder is that surely we have much bigger challenges to deal with (and spend money on) such as massively boosting social housing, improving the benefits system for the least privileged, better schools and funding our armed services and police properly. But that is a cop-out of course. Just because you have higher priorities doesn’t mean you should ignore the very real concerns.
For me the utility and infrastructure sector is in crisis but not for the reason everyone is concerned about. Put simply we are falling behind in the international arena and existing capital allocation mechanisms are not calibrated with national priorities. In many sectors it is clear there is no master plan, coordinating discrete players towards a national goal. This is most obvious in broadband which is a disaster but it’s also visible in power generation where a myriad of schemes is being devised to somehow get us to a decarbonization master plan.
But where’s the base load? Who will provide the backup sources of supply? Who is coordinating everything? How does nuclear fit into this framework given that no pure private sector would ever be deluded enough to invest in this tech for the long term?
In my view these are much bigger challenges than the average householder having to pay an extra few hundred pounds a year for power – what will they say when the bill is three times the current level and we still face power outages?
So how do we in the pragmatic centre (and centre left) grope towards a better solution to these challenges without falling into the magical world of Corbynism – nationalize it all and we can all have lower bills and the government can pick up a dividend cheque. Trebles all around!
Quite the best contribution to this debate comes from the inestimable Dieter Helm, a professor at Oxford – along with Paul Collier (also at Oxford) he is one of the most innovative economists of our time.
I strongly suggest going to his website at http://www.dieterhelm.co.uk/ and reading through his paper on the Systems Regulation Model. This absolutely chimes with my own thinking. I’ve long thought that the state needs to set national planning goals for infrastructure and then let the private and public sector bodies slug it out between them to deliver on these policies. Crucially this framework also does away with the increasingly obtuse regulations (especially RPI X) which let the private sector monopolists game the system and thus use massive leverage. In this debate what matters is not who owns the stuff – an obsession with Marxists and extreme Leftists – but which system works for all of us, allowing for a fluid boundary between public and private. What the Germans would call a true social market model. Anyway, here’s the key bit from Helm’s report, which he calls a third way between the existing system and the Corbynite challenge. Its called a System Regulation Model or SRM.
“Its merits are in the setting of prices through markets and the provision of the public goods of security of supply and the public interest in the Universal Service Obligation (USO) through system plans. It draws the economic borders of the state precisely where they should be, and allocates risks to those best able to manage them. It can, in principle, be delivered by either private or publicly-owned companies, and hence is broadly ownership neutral, leaving competition between public and privately owned businesses to sort out which is most efficient. It places the public controls with system operators and not the utilities themselves, and as a result it cuts away many of the criticisms of the existing model and the behaviours of the companies. It allows much of the regulatory bureaucracy to wither away.”
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