In the interests of educating myself I recently read Chapter 12 “The State of Long-Term Expectations” in John Maynard Keynes’ seminal economics tome General Theory. I particularly like his statement: “it needs more intelligence to defeat the forces of time and our ignorance of the future than to beat the gun”, but then I’ve always fancied the intelligentsia.
In the chapter, which was published in 1936, the same year Adolph Hitler opened the Olympic Games in Berlin, Keynes says “investment based on genuine long-term expectation is so difficult today as to be scarcely practicable”.
He would be rolling in his grave if he saw how much that has deteriorated, and that the course of pension funds, long-term investors by definition, is seemingly to defy that mandate as much as possible.
On reading the chapter a number of things are clear.
In assessing long-term expectations a different point of view is needed. And this applies to any long-term thinking, whether investments or otherwise.
As Keynes says the “facts of the existing situation enter, in a sense disproportionately, into the formation of our-long term expectations,” so we require a thought process that discounts, or at least considers, our current situation and expectations. This is difficult to do.
In an attempt to exert control, humans project their knowledge of the current situation on to the consequences of future actions in a type of behavioural risk management mechanism. Mostly this is redundant, as the future is dependent on so many unforeseen and interacting forces.
But as it applies to this industry, if investment and business executives at pension funds can ignore career and peer risk, their current situation, when making decisions about the future, the decisions they make would most likely be very different.
But overwhelmingly perhaps the best lesson from the chapter is that “we devote our intelligences to anticipating what average opinion expects the average opinion to be.”
This is ok if you’re interested in the average.
If you’re a fund manager you might be interested in beating the average, so it’s useful to know what the average is. But if you spend too much “intelligence” on anticipating the average then you’re not devoting it to achieving your best in an absolute sense.
Most dangerously a pension fund need not know what its peer average is, particularly when it comes to performance. It only needs to concentrate on how to manage its own assets, against its own liabilities to produce the best income for its own members in retirement.
The peer group, the average, doesn’t matter. No intelligence needs to be spent on determining what average opinion expects the average opinion to be.
But that requires courage.
Keynes bemoaned the price of being unconventional, noting that general society had little mercy for what it deemed eccentric.
“For it is the essence of his behaviour that he should be eccentric, unconventional and rash in the eyes of average opinion. If he is successful, which is very likely, he will not receive much mercy. Worldly, wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”