Let’s not have business cycles that cause calamities

RUSSELL NAPIER, Global Equity Strategist

THE HINDU - BusinessLine | October 28, 2016


There’s something to do with the human heart, that we constantly fall into the same errors. And as we saw with the global financial crisis, the consequences of mistakes made by finance affects millions of people.

In 2004, Russell Napier, a global equity strategist, started a course for finance professionals about financial history and learning from the mistakes of others. After the financial meltdown of 2009, he says, the course is gaining popularity. Napier was in India recently to set up the first international branch of his Library of Mistakes at Flame University, Pune. Edited excerpts from an interview with BusinessLine.

Can you explain what the course in financial history is about? And why is it necessary?
In 2004, I established a course called The Practical History of the Financial Markets, as an antidote to business school education, which is highly focused on equations and numbers. We believe that finance and business have much more to it than those two dimensions. A novel thing to do in 2004, interest in this approach to investment took off only after the global financial crisis. I call it a liberal arts approach to business education.

It was 30-40 years ago that mathematical finance began to take over from some of the things we’ve long done and long tried to understand; we’re trying to bring that back. We do that in two ways — we run this course four times a year. It’s a two-day course from 8 a.m. to 8 p.m. with 24 hours of teaching. We run it in London, Edinburgh, Singapore and Mumbai.

The second thing we run is a library, called the Library of Mistakes. It is a business and financial history library because business schools aren’t teaching this. This is a place where students come and study. You’re learning some psychology, sociology, accountancy, economics — it’s a multi-disciplinary approach to understanding business. There’s an 80 per cent overlap of our library with the one in Pune, and we’re aiming for a 100 per cent overlap eventually. I’m looking to set up four more such libraries across the world. This will go beyond books and will gather contemporaneous opinion on the markets as well. I often talk about the markets and I’m often wrong. It’s one of the great problems with our business. People often don’t know when they’re wrong. To come back and analyse why it was wrong helps us not to be wrong the next time.

As a race, are we reluctant to learn from our mistakes?
Humans, of course. If we did learn, there would be fewer mistakes, not more. We’re making the same mistakes now that we used to make before. I was educated in law and I once saw a quote from Jim Grant, a famous analyst. He said, “In science, knowledge is cumulative but in finance, it is merely cyclical.”

Why is it that if our physicists and chemists can learn — nobody repeats their experiments — that in finance, we keep repeating the same mistakes? There’s something to do with the human heart, that we constantly fall into the same errors. And as we saw with the global financial crisis, the consequences of mistakes made by finance affects millions of people. The collateral damage is huge. Why do scientists learn and why do financiers forget?

But business is cyclical and depressions happen. Can we change that?
Since World War II, how many business cycles have you seen that damage the system? You need cycles because people must fail. It is said that capitalism without bankruptcy is like Christianity without hell. People who do a bad job have to be closed down and people who do a good job must be rewarded. But let’s not have business cycles that cause calamities. So, financiers have a huge responsibility. If only we have business cycles without depressions, that would be a good thing.

What are the mistakes we’re making now that are repetitions of mistakes from the past?
Price is a wonderful thing, it gives us information about demand and supply and that gives businessmen information. But we’ve decided to suspend some of the key prices, post-2009, through central banking and government regulation. Fundamentally, if you mis-price interest rates, you mis-price everything. It’s a mistake India learnt in 1991 and it has since turned its back on it, while the Western economies are returning to it.

We know the price of interest is wrong and too low, and asset prices adjust to that artificial low rate. That’s a bubble and nobody knows when it will burst.

What view do investors abroad have of India?
I think everybody has the same view, the thing that stops them (from investing in India) is the valuation, it’s always seen to be overvalued. I’m bullish on India. But it’s always been very expensive and that’s a mistake I made in the past. If it ever falls again, I think I would have learnt my lesson.

(Source:http://www.thehindubusinessline.com/markets/stock-markets/lets-not-have-business-cycles-that-cause-calamities/article9282252.ece)