Last week was a big week for finance. You probably didn’t notice it happening (unless you are a reader of the Daily Record), but a small corner of the industry has done something that might play a small part in making all of our futures a little bit better.
These altruistic folks have opened a new library in Edinburgh: the Library of Mistakes. It is small – just two rooms in a mews in the New Town. But it is dedicated to encouraging students, analysts and those planning to use the new pensions legislation as an opportunity to take responsibility for their own money to follow the advice of Eleanor Roosevelt.
You must learn from the mistakes of others, the former first lady said, because “you won’t live long enough to make them all yourself”.
The result is shelves piled high with as many books and papers as can be found on the great financial and economic mistakes of history and a truly brilliant motto: Mundum mutatu errore singillatim (changing the world one mistake at a time).
There were two speakers at the opening. First was asset manager CLSA’s investing guru Russell Napier, the brains behind the project. He reminded us of just how often “smart people make stupid mistakes”.
Then came Lord Lamont of Lerwick, who was very nice about having to give his talk, while being photographed standing in front of a large sign saying ‘Library of Mistakes’.
He talked about some of the reasons for the endless catalogue of mistakes made by investors, economists and governments, and pointed to one of the factors that make them inevitable, such as the utter inability of any of us accurately to forecast future events. Lamont said that, as chancellor, he was led to believe he was “presiding over the deepest recession since the 1930s”.
In fact, it was one of the mildest of the post-war period, something that only became apparent some time and many statistical revisions later. If you are working with ungainly and constantly changing statistics such as GDP, it is impossible to forecast either the past or present.
Being chancellor is like “trying to catch a train using last year’s timetable”. That makes even having a go at forecasting the future seem entirely ludicrous and acting on specific forecasts about the future even more so.
So what of the mistakes we are making today? No one at the launch seemed in any fear that the library will suffer from lack of material in future.
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John Lang, Director, Tower Hill Associates Ltd.
I talked to guests about the London housing bubble, the mistake here perhaps being the idea that house prices in the UK must be made to rise at all costs. And about the euro, which Lamont reckons might soon deserve a dedicated section.
There were suggestions that an “Alex Salmond wing” might turn out to be useful, particularly given that much of the economic case for Scottish independence rests on estimated numbers to produce forecasts for a future that, if it comes, will contain very few of the same variables.
There was also a view that a special area where central bankers could come to learn about the importance of distinguishing between real growth and asset bubbles might save us all a lot of unnecessary pain.
But the people who have set up this library are primarily investors, so much of the space will be devoted to the creation and the collapse of bubbles and the money we lose from participating in them. If anything can remind you to buy low and sell high rather than the other way around, it’s spending a few hours in Wemyss Place Mews.
This brings me neatly to one of my own mistakes. Around this time a year ago, I suggested that you buy a small stake in the Russian equity market. I told you about how I can use my email inbox to gauge just how out of favour markets are – I get 250-plus emails a day, so all I need to do is type a word into the search function and I immediately know just how contrarian investing in it would be. At the time of typing, China was giving me 400 emails or so, but Russia was returning just 20.
So I looked more closely. The Russian economy, while famously corrupt and overly dependent on energy, seemed in no worse shape than any others; the occasional fund manager had a story to tell about better treatment for minority shareholders; and best of all, it was very cheap – the index was trading on a price/earnings (p/e) ratio of about 5.6.
“It won’t stay that way,” I said and I was right, it didn’t. It got cheaper. The investment trust I suggested you buy – JPMorgan Russian Securities – is down 24% since, proving yet again the point Russell Napier made at Tuesday’s launch that unpredictable crises (Ukraine in this case, obviously) occur rather more often than regular mistake makers like to accept.
The good news, such as it is, is that it is now even easier than it was to stick to one of the main lessons suggested by the Library of Mistakes, which is to avoid bubbles. You can find overpriced assets all over the world at the moment – but you can’t find many listed on the Russian stock market.
The average p/e is now down well below five times and any analyst who can be bothered (almost none) could give you a long list of stocks trading below their book value.
Holding Russia is, of course, even more uncomfortable than it was a year ago, but I’m going to keep my holding – after all, if all cheap markets went up in a straight line, investing would be just a little bit too easy – and the Library of Mistakes wouldn’t already be worrying about shelf shortages.
• This article was first published in the Financial Times.