Jonathan Davis: Investors can be stupid. But that is not what his complaint is

'Simon Davies blamed the investment industry throwing petrol on a fire lit by basic greed'

Like most apparent storms in a teacup, there is a serious issue lurking behind the remarks attributed this week to the hapless Simon Davies, chief executive of Threadneedle Asset Management. His reported comment that "investors make stupid decisions" was given prominent coverage in the Financial Times and has attracted comparisons with Gerald Ratner's famous comment about his company's jewellery being "crap". This, you will recall, appeared for all the world to be true but was deemed not the sort of thing you want to be saying about your own company's products.

In practice, out of fairness to Mr Davies, who is a serious guy running one of the more serious companies in the fund management business, there is no real comparison between the two cases, though the volley of PR activity that followed reports of his unfortunate remark underlines how much damage his firm presumably fears his "out of context" remarks, if taken at face value, could do to their business.

Having met Mr Davies, and knowing how Threadneedle goes about its business, I can safely say his is not a firm which sets out to treat its clients with Ratner-like contempt. (I could name several others, some household names, who display a breathtakingly arrogant approach to the poor saps who paid their extravagantly high salaries through the latter half of the great bull market.)

In any event, it is hardly a startling new insight that many investors fail to display great percipience in the way they invest their money. You only have to look at where the bulk of Isa money goes each year, or recall some of the worst scandals, such as Lloyd's of London, Barlow Clowes and more recently split-capital trusts, to see the force of that observation.

Of course, there are always explanations for the most disastrous cases of investor folly. Ignorance and credulity are as much to blame as stupidity. I do not share the increasingly common view that whenever an investment turns out badly, somebody else, an adviser, a product provider, a fraudster, must, by definition, be to blame. The seeping compensation culture that is spreading through the investment world under the general heading of "mis-selling" is not in general a healthy phenomenon. That said, the point Mr Davies was trying to make was not really about the consumer at all. His argument was that the investment business has to carry a lot of the blame for its present difficulties, of which consumer unhappiness is just one. His complaint is that the investment industry "feels compelled to make a living by throwing petrol, not water, on the fire lit by basic human greed". It is always easier, he says "to sell someone what they want than to sell them what they need".

That is well put and, in my view, well said. It is genuinely not easy for even well-educated and intelligent private investors to appreciate that many of the assumptions needed for successful investment are counter-intuitive. You need to understand why diversification is so important in reducing risk; why returns from different asset classes tend to "revert to the mean" over the longer term, and why acting with the crowd is so dangerous in financial markets.

Professional investors have no such excuses. Yet the firms that employ them continue to pump out products that are flavour of the month in preference to those that are out of vogue but in many cases represent better value. Many commission-remunerated advisers in turn push the same products to their clients in preference to more suitable alternatives.

It is a recipe for short-term commercial success, but longer-term regret. The investment industry has only itself to blame if consumers now regard it as being unworthy of trust, and Mr Davies is right to point it out.

* I note that two more well-regarded professional investors have joined the ranks of those making cautiously optimistic remarks about the state of the world's equity markets. The first is Peter Lynch, who enjoyed a fabulous reputation during his time at the helm of Fidelity's Magellan fund, but sensibly quit while at the top of his fame. He says he is finding more opportunities for the shrewd, long-term investor in equities than he has done for many a long month.

Also sounding much confident is another American fund manager, Bill Miller, of Legg Mason. He declared flatly in a recent interview with Barron's, the US stock market weekly, that in his view the bear market came to an end on 9 October last year, when the US indices hit their lows for the year. He particularly likes blue-chip stocks with well-covered and secure dividends, such as Eastman Kodak.

The views of Messrs Lynch and Miller command respect because of their track records. Peter Lynch is among the few fund managers whose performance record is so exceptional that academics have shown it cannot be attributed solely to luck. Bill Miller's fund is the only mainstream fund in the US to have beaten the S&P index for each and every one of the past 12 years.

Sadly, of course, that tells us little or nothing about how the market will actually do this year (or whether Mr Miller will repeat the feat this year). While there are now plenty of pockets of value in shares on conventional measures, the US market, in particular, still looks vulnerably high. But there is no doubt that the longer-term outlook for equities in the UK is now not bad, which is probably why (as Mr Davies will affirm) you will see so few equity fund launches this year.

davisbiz@aol.com