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DIY investor: Financial facts and fictions

Although it is strictly true to say that we put our money into financial assets, what we really buy into are the narratives that accompany them
December 11, 2014

Stories make the investment world go round. Although it is strictly true to say that we put our money into financial assets, what we really buy into are the narratives that accompany them. Some are spun to attract us and some we tell ourselves to justify our decisions, but in either case it is our age-old need to find structure and narrative progression in the world around us that makes them such irresistible influences.

History abounds with examples of stories’ ability to persuade people to part with their money, from the untold riches promised three centuries ago to backers of enterprises in the South Sea to the near-universal belief in 1999 that the internet was about to transform every aspect of our lives. Perhaps it is unfair to concentrate simply on manias and bubbles to make the point. How about the Brics instead? The notion that a group of large developing countries was set for certain growth and expansion must count as one of the most effective investment stories of all. Even though the reality has proved much messier than one might have anticipated when Goldman Sachs coined the term in 2001, it is still attracting believers.

Fortunes and careers can be made on the strength of a compelling story—which is why a service being offered in the United States, highlighted recently by investment writer Paul Amery, seems to me such a clever idea. Motif Investing is an online service that in a single transaction allows investors to buy portfolios of up to 30 shares—dubbed “motifs”—that are based on simple investment stories. The site contains lots of ready-made motifs that users can buy into, such as Cyber Security, China Internet, Renter Nation, For-Profit Colleges, and so on, as well as others created by users themselves. In each case, the assumption is that an identifiable trend is at work that will drive the stocks in each “motif” higher over time.

In effect, the service allows us to create a diversified investment fund to reflect our own belief in a particular narrative about the way the world is going. As a method of persuading people to invest, this borders on genius.

Advocates of this approach would argue that Motif is simply making it easier, cheaper and possibly safer (given the diversification in its story-based portfolios) for people to do what they would be doing anyway—buying into the stories they happen to believe in. Critics might respond that the beauty and danger of investment narratives is that they simplify a complex situation into a readily comprehensible set of causes and effects. In doing so, they filter out much of the chaos and uncertainty that will ultimately determine whether the story has a happy ending.

Encountering Motif Investing prompted me to think about which stories I find most convincing at the moment. Top of the list is the notion that much of the world is stuck with low growth, and most consumers will continue to count the pennies. Therefore, companies that help other companies or consumers to save money will be worth watching: I call them the Nifty Thrifties. If revenues are not growing the obvious alternative is to cut your costs. Businesses will invest in order to achieve that, if the returns are great enough.

One company I singled out as part of this trend specialises in helping organisations to use less energy; an area in which many have scope to make savings. But by the time I came across it the oil price was already falling and what had seemed a no-brainer at more than $100 a barrel now looks rather less clever as crude has became steadily cheaper and the pressure to economise has diminished.

This episode highlights two important truths: first, without narratives we struggle to make investment decisions, and second, there are few things more important in investing than the ability to let the facts get in the way of a good story.