Geoffrey to Michael
17 March 2000
Thanks for the preface. There is only one suggestion, and that is you must
get out of the habit of referring to "Britain" as "England" if you want to
sell the book in Scotland, or Wales for that matter. The residents of
Britain's Celtic fringe are a touchy lot.
I am copying to you a message I have sent to the PKT site, and it contains
material you might like to use.
To PKT: Lemmings
Investment volatility: from Geoffrey Gardiner
March 17, 2000
On 14th March 2000 the Financial Times of London published the following
From Mr James Coleman.
Sir, I would like to protest vigorously about the lack of really worthwhile
criticism of the "new economy" by leaders of opinion in the City of London,
particularly of the final folly of the changes to the FTSE constituents. In
view of the effect these changes will have on the economy is it not too much
to ask that companies allowed into the FTSE should have at the very least a
history of one year s good net profits before they are even considered for
What is going to happen now? The FTSE will soar as the idiot "lemming" fund
managers sell good stocks in order to buy the rubbish that has been
introduced into the FTSE. So for a few weeks, maybe months, the market will
rise in a self-fulfilling spiral as the lemmings track the index. They buy,
stocks rise, weightings then increase; lemmings buy more, stocks rise
further, weightings again increase and so on.
Until finally the crash occurs. Who is going to be hurt? Not your fund
managers who are paid on relative performance. Not your city slickers who
will have been in and out quickly. Not your venture capitalists who will
already have their money in the bank. And not the directors of these
worthless "tech" companies. No, the people who will suffer are the future
pensioners whose money is being used by fund managers. Since all these "tech"
companies have entered the FTSE at extremely high valuations, pension funds
will at best not increase much in value over the medium term and at worst
will be worthless for pension purposes.
124 Hartford Road,
Cambridge PE18 7XQ
Is it not nice to read something sane? But I may be venturing into insanity
again because I propose to revive the discussion of last November about
volatility, and I recall that at the end of that discussion I was covered in
bruises from being swatted with multiple weighty papers.
I had dared to say what to me is axiomatic. A successful speculator, by which
I mean one who makes money, makes a market more stable, and unsuccessful
speculators do the opposite, but fortunately tend to go broke rather quickly.
The papers seemed to be all about "noise traders", not professional fund
managers. In a paper which claims to be scientific, one really must not use
pejorative expressions like "noise trader" for the activities one is
researching, supposedly with impartiality. I may sound prissy, but I am
unlikely to bother to read anything which reeks of class distinctions. But
putting such niceness aside, there was a bigger problem: the academic
researchers, possibly through prejudice, had targeted one sector of investors
only, the wrong one, in their search for the cause of volatility. They may
have assumed that the graduates whom they have honoured with double firsts
become the skilled analysts and researchers in prestigious merchant banks,
and later are the senior fund managers. They are therefore immaculate in
conception, are they not? Only lesser mortals, who are not products of the
"satanic mills"* of academia, become "noise traders". Of course no scientist
would make such an assumption would he? In practice the "noise traders" are
often the professionals investors dealing on their own account, and doing
very different things from what they do with other peoples' money.
It is the professional fund managers with their professional hats on who are
the "lemmings", as Mr Coleman calls them, and the destabilisers. In earlier
FT letters they were called "incompetent lemmings", which provoked an amusing
discussion as to what a lemming did to be incompetent. Did he fall off the
cliff twice or not at all?
I speak not as a peruser of learned papers on this topic, not because I
cannot read, for I can, and in a modest variety of ancient and modern
languages, but because in this instance I do not need to. My evidence is
first hand observation, not scribblings in an economic journal based on
second hand information. I have fifty years experience of investment markets,
and have observed what went on with great care, and with what my senior
colleagues used to call "a nasty mind."
From 1971 to mid 1974 I was very close to the heart of an enormous investment
institution, Barclays Bank Trust Company. This was before the "Eagle" started
falling (vide Martin Vander Weyer's book "Falling Eagle", Weidenfeld and
Nicholson), and we were a subsidiary of one of the world's top five banks in
both balance sheet total and profits. Indeed we may have been even more
profitable than appeared, as Barclays was trying to hide its enormous profits
in every way possible, and one such way was to put up to 46 per cent of the
salaries' bill into the pension fund. My official role was "assistant to the
general managers". There were two general managers, both of high calibre:
Noel McCann, graduate of Trinity College, Dublin, Barrister-at-Law, former
Chief Inspector of the Bank, and Derrick Hanson, LLM, Barrister-at-Law, since
made an Honorary Fellow of the Chartered Institute of Bankers for his
services to banking. The corporate investment activities of the bank came
under an Assistant General Manager, David Moss, who had a business degree,
and, most prestigious of all, was an actuary. He was very highly regarded in
the City of London. We had a board of the great and the good. Among them were
Nigel Mobbs, CEO of Slough Estates, the MP Edward DuCann (who amazed everyone
by prophesying that there would be funds investing in Russia in his
lifetime), and Professor Jim Ball of the London Business School.
We covered the whole range of financial services, and our investment
activities included unit trusts (equals "mutual funds" in American), pension
fund investment, trust investment, private client investment, insurance
company investment, property investment of all kinds, and heaven knows what
else. You name it, we probably did it. My role was rather like what the
French call "Chef de Cabinet". I had to know everything that was going on in
every department and subsidiary . I saw all the correspondence in head office
and if there was a dirty job around which no-one else wanted to do, or no-one
else had the skills to do, it was mine. There was at first another assistant
whose sole job was to monitor the off-shore operations (Channel Islands, Isle
of Man, Cayman, Bermuda, Bahamas, Melitco, Nauru, Luxembourg), but he
resigned and I found I could deal with that as well.
The unit trust activities (Barclays Unicorn) were particular fun as we had 41
per cent of the gross UK market for a while. Which reminds me I was also on
the marketing committee.
In the middle of 1974 I moved back to the sharp end of the business which
included the selling of investment media, and especially one which I had
devised and launched before leaving London. My new base was Cambridge, an
international centre because we had graduates of the university as clients
who lived all over the world. Several members of the Keynes family were our
clients. We were successful as later statistics showed that in the last five
months of 1974 my investment manager and myself were responsible for 2.5 per
cent of the net sales of unit trusts for the whole of Britain for the whole
of 1974. We were the only people with the right product for the time and the
skill to sell it in a period when the All Share Index was slipping down and
down, and horrific financial crises occurred, culminating with the collapse
of Burmah Oil, and its rescue by the Bank of England. The market his its low
in December 1974. It had more than halved from its peak two years earlier. My
staff and I wanted to go into the market heavily to take advantage of the
crash; the top investment managers in London were against. They wanted to see
the market turn first. The rise in January 1975 was so rapid they got left
What had happened to cause the 1974 crash? The facts emerged very clearly
when the financial statistics for the quarter were issued.
What one has to remember is that the market for company securities in Britain
is basically a one way market: net sales by the public, net purchases by the
insurance companies and pension funds. It has been the same in almost every
year for which I have the statistics. Every year the National Income Blue
Book shows that the personal sector of the economy is a net investor in every
kind of investment except company securities. The only years when this
pattern has not been true were those in which Maggie Thatcher was making
gigantic privatisations. Privatisation increased the number of personal
investors from 2 million to 10 million, but otherwise did not affect the long
term saecular trend for the personal sector to be net sellers.
The personal sector has to pay every year large sums in capital taxes. As the
personal sector in the aggregate is a net investor in everything else, it is
I think correct to deduce that in the aggregate the personal sector pays its
capital taxes by selling company securities. The progress of the divestment
has of course been monitored by academics, starting with the excellent study
by Professor Jack Revell of Bangor University, North Wales. At the
commencement year of his study the public owned 80 per cent of ordinary
shares, now it is under 20 per cent.
Because they are largely for the purpose of paying tax, many of the sales are
not arms length free market sales. They are forced sales. They have to happen
in a fairly steady stream with little leeway for manoeuvre, regardless of
what the policy of the buying institutions might be. If the institutions stop
buying the prices collapse.
The financial statistics show that that is precisely what happened in 1974.
In the fourth quarter of 1974 the insurance companies were net sellers of
£62.6 million of company securities, compared with purchases of £6.7 million
in the third quarter. This had never happened before, so far as I could
discover. The net purchases by the insurance funds for 1974 were £11.7
million, compared with £679.9 million for 1972, a year in which the All Share
Index reached a high of 228.18, and £356.7 million in 1973. The highest point
of the All Share in 1974 was 150.53 and its low 61.92.
The insurance companies remained net sellers in the first quarter of 1975, to
the tune of £26.3 million, but the private pension funds, who had been net
sellers in the third quarter fo 1974 to the extent of £7.8 million, were net
purchasers of £114.1 million in the first quarter of 1975, so it was they who
rescued the market.
The personal sector figures are net sales in 1972 of £1225 million, in 1973
of £2073 million, in 1974 of £1368 million, and in 1975 of £1265 million.
During that crucial fourth quarter of 1974 the personal sector sales were
unusually low at £108 million.
I do not think we have to do a regression analysis of such obvious statistics
to read the correct message which is that the institutions were a lot of
"incompetent lemmings", and that private individuals acted rather coolly,
given their weak position. But even their reduced sales were still enough to
overwhelm the buyers.
But there is another message from the statistics: Foreigners sold £493
million worth of company securities in 1972 when the All Share was up in the
220's, bought £286 million in 1973 when the index was between 200 and 134,
and bought £982 million in 1974 while the index was diving. I have no figure
for 1975. Who were they? The stats do not tell us, nor do they give the
quarterly figures. Why were foreigners able to outguess the British
institutions so decisively.
All values need to be multiplied by about ten to give modern equivalents.
The lesson of all this is that that if you want to know who destabilises the
market it is without any doubt at all the institutional fund manager. Why do
highly educated people act like dolts? Simple. I believe it is because if a
manager acts alone and is wrong, he loses his job (like the man just sacked
from Phillips and Drew), but if he does the same as everyone else and is
wrong, that is just bad luck!
I have sat and listened to a investment research chief with impeccable
academic antecedents telephone his opposite numbers first thing every morning
in other institutions to find out what they are doing, unless of course they
phoned him first.
The small trader who creates the so-called noise is typically a bank clerk
who learns about the stock market during his stint as securities clerk, and
has experienced old hands to guide him. I joined Barclays Trustee Department
as a graduate trainee in January 1953. By June I was handling full time
masses of stock exchange orders and made my debut as a "stag" on my own
account. In four days I made nearly one hundred per cent. My richer senior
colleagues made small fortunes. We were sceptical cynics to a man. The girls
were less inclined to take part, but those that did were brilliant, mainly
because they were more ruthless and less sentimental than men.
In those days the London broking houses served the same purpose as the Church
had done in an earlier age. That is it provided jobs for the fools of the
aristocratic families. For good advice and service one used provincial
brokers. That I still do, and a year ago Blankstone Sington of Liverpool made
a suggestion to me which has produced not only a 24 per cent income yield but
also a 400 per cent capital gain. No, it was not an internet stock! Michael
Blankstone, the founder of the firm is the descendant of Jewish refugees from
By the way, I have had enquiries from America as to what I think of "Falling
Eagle" by Martin Vander Weyer. I am currently reading it and so far I find
myself agreeing with the picture Vander Weyer paints of why the Barclays Bank
rose to the top and fell back down again. If his book points the blame for
the fall, it is at Sir John Quinton. Quinton and I both joined Barclays in
the first ever graduate recruitment scheme, and were both Cambridge
graduates, but I opted for the more interesting but less lucrative trustee
department whereas he chose to be a vanilla flavoured banker. I got out
before his chairmanship.
*A fanciful interpretation of Blake's "Satanic Mills" in his poem "Jerusalem"
is that he meant the colleges of Oxford and Cambridge. He did not, of course;
the mills were the zinc smelters on the Mendip Hills in Somerset where legend
says Christ spent his missing years working for his tin merchant uncle,
Joseph of Arimathea.