Pick the fund manager with the widest grin

According to recent research, the happier people are, the better they predict the future. So perhaps, says Matthew Lynn, investors should forget fund performance charts, and ask if the managers are feeling good about themselves.

What makes a successful trader or fund manager? An all-encompassing view of how the global economy is developing? An instinct for a bargain? A fleetness of foot and the confidence to take bold positions? A willingness to ignore the herd and buy the stuff everyone else is selling? Or the patience and perseverance of a tortoise? There are many great traders and investors who have made fortunes through one or other of these qualities. But actually, the answer may be a lot simpler than any of these.

According to research released this month by the French business school Insead, the happier people are, the better they are at predicting the future and the more depressed they are, the worse they are at it. It has long been noted that more cheerful people tend to have a more optimistic view of the future, while the more miserable, not very surprisingly, are usually more pessimistic. In the markets, the optimists are usually bulls, while the pessimists are bears.

But the Insead study went a lot deeper than that. It took 1,100 people and asked them to predict the results of games during the 2010 World Cup. They weren't particularly being optimistic or pessimistic they weren't making predictions for their own nations they were just forecasting what was likely to happen. As an incentive to try and get it right, there was a cash prize on offer.

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The more depressed the people were, the less likely they were to make accurate predictions. Indeed, many of the most down-in-the-dumps did worse than they would have done just by picking winners from a hat. They were significantly more likely to make ridiculous predictions, such as forecasting that North Korea would win the whole tournament.

The Insead team is now taking the same methods and applying them directly to theemotional states of stock and commodity traders. But the implications are already clear enough. If being happy or depressed has a bearing on your ability to forecast the outcome of events, then it follows that happier fund managers or traders will be better at their jobs than their more morose colleagues. The snag is, how do you influence the happiness of your staff? Well, in truth, it isn't that hard to do.

We have a fairly good understanding of what makes people feel good about life and what make them depressed. Most of the key points were summarised by the Action for Happiness' campaign launched earlier this month by Professor Richard Layard, the guru of happiness economics, among others. Happiness, it turns out, comes down to a few fairly simple things. Do things for other people. Take care of your body. Notice the world around you. Keep learning new things. Be part of something bigger. Have goals to look forward to.

This may sound fairly like being in favour of motherhood and apple pie. Yet, despite sounding platitudinous, such attributes are likely to make people more balanced and positive and significantly less likely to suffer bouts of depression. Here's the catch, however. These are not the kind of values promoted within the average bank or fund management firm. If anything, the financial markets emphasise precisely the opposite. They concentrate on paying out huge cash bonuses, usually tied to demanding performance criteria, even though there is very little evidence to suggest that beyond a certain minimum level having more money actually makes people any happier. They promote a ruthless competition between staff, and between companies, constantly benchmarking their performance against their peers.

In fund management, for example, you have failed if you haven't managed to beat the guy doing the same job at the next fund, even though you may have made plenty of money for your investors. That is only likely to make staff feel anxious and insecure. And they promote a relentless short-termism, continually shortening the time to come up with results, even though it is usually far better to concentrate on medium-term performance, and more satisfying for the staff as well. In short, if banks and fund management firms were deliberately setting out to make their traders and stock-pickers depressed, it is hard to see how they could be doing a better job.

But, of course, the more depressed their staff are, the worse they will be at their jobs. In fact, it is a classic Catch-22. To trade well, you have to be happy. But everything about the work is likely to make you depressed. So you'll end up being a very bad trader the kind of person who thinks North Korea will win the World Cup, or that oil will be trading back at $20 a barrel by the end of next year. Is there a way out of that?

Perhaps. Maybe investors should stop looking at all those charts that banks and fund managers love to produce showing how they outperformed their peers over the last three months. And maybe they should stop listening to all those boastful advertisements about how staff pay is linked to performance. Instead, just ask if the traders and stock-pickers are cheerful, feeling good about themselves, and are well looked after. Who knows, over the medium-term this might even produce better results.

This article was originally published in MoneyWeek magazine issue number 534 on 22 April 2011, and was available exclusively to magazine subscribers. To read all our subscriber-only articles right away, subscribe to MoneyWeek magazine.

Matthew Lynn

Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years. 

He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.