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Independent view

This year will be an auspicious time for an anniversary and celebration of the past, characterised I suspect by ill-fitting comparisons between events of several decades ago and today.

We will no doubt endure endless documentaries, commemorative DVDs and illustrated historical publications gazing back at VE Day, VJ Day and, to a lesser extent, perhaps VT Day (Victory at Tra-falgar 1805).

The list goes on – Elvis would have been 70 and, of course, the greatest single piece of scientific thought since Newton, the theory of relativity, is 100 years old. No doubt Albert Einstein will be staring out of T-shirts from the windows of Next all summer.

I would like to dwell on Einstein for a moment as I lumber to the point of this piece. You see, Einstein’s famous paper, submitted a century ago, was rather more philosophic than scientific and if you want it summarised in a sentence (which is, of course, impossible but hopefully you are already familiar with some of the basics), it stated that the laws of the universe are the same for everyone but they may be observed differently, relative to your position in the universe.

Man in Crows Nest on boat drops ball. Ball falls straight down. Man on dock, observing boat and ball moving, sees ball travel forward and not straight down at all – but same rules apply in each case. Or something like that.

Einstein not only conceived his theory, he proved it mathematically. Others had wrestled with the idea since Galileo but Einstein was able to dismiss his preconceptions tot-ally and start again – he famously quipped that “unconscious preconceptions are the most dangerous of all”. He literally rewrote the rulebook.

Now travel with me if you will to another bafflingly unch-arted universe with its fair share of theories and suppositions – the world of the investment manager.

I think IFAs have a lot in common with those poor souls who had to tear up their textbooks in the wake of Einstein’s revelations for the selection of investment funds increasingly has to be based on ignoring the silver tongues of presenters at roadshows, seeing past the reputations or media manipulations and understanding that, like gravity from an outsized galaxy, the pull of a huge and successful fund is difficult to resist.

You see, there is a theory of relativity in investment fund management as well. It states that no fund has any true value at any time. It only has a perceived future value from the present viewpoint of the potential investor and this is largely dictated by the actions of other people in the same investment universe who are randomly buying and selling on the same arbitrary basis. It all comes down to chaotic probability but not, and this is the key point, certainty.

As IFAs, we all have to balance lack of certainty by manufacturing a credible case for the recommendations we make in long and verbose reports. These must be balanced, in true Newtonian fashion, by an equally voluminous tome of disclosures, risk warnings and legal obfuscation.

Ultimately, the strange workings of the investment universe will continue to prevail and investors will get their rewards or otherwise. Yet there are many who would seek to convince us that it is otherwise.

For example, If you read the latest edition of Citywire’s World Beaters, will you discover the next great theory on investment principles mapped out in an aesthetically pleasing formula? No. Instead, you have a number of well-paid and well-educated individuals trying to outguess each other.

There are phrases such as information flow, convictiondriven, crucial absolutes or forensic accounting which pepper a flattering synopsis of the manager’s career to date.

Now I am not picking on Citywire any more or less than anyone else – they are just one of many. But in all this spin, it is always the IFAs who ask to get off and be sick.

My point is that just as we look back at our heroic past performances in 1945 and 1805 and rightly celebrate those achievements, we should rem-ember, outside the basic rules of strategy and execution, that it has very little to do with what is happening today.

Similarly, in the IFA universe, regardless of past performance, the rules of good investment advice have never changed – diversification across asset classes, likely return on investment and timescale, costs, worst-case failure and best-case success.

The perception may vary but the rules are the same, whatever your viewpoint – relatively speaking.

Steve Buttercase is a senior adviser at M2 Financial


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