Fund Manager's Career Risk,

 or Why the Stock Market Acts Irrationally Every so Often

The following is an excerpt from a September 2011 essay by Dylan Grice, formerly of Societe Generale.

Early in my career as an economist , I remember being taken around to see clients with a certain gloomy strategist known as Albert Edwards. It was early in the spring of 2000 and tech hysteria was fever pitched. Talk was of a “new paradigm” and madness masqueraded as wisdom. Albert had been going around, with me in tow, arguing that the madness was, well … mad … but most meetings were hostile and Albert’s views were felt to be too extreme. But one meeting stands out in my mind, making a deep impression on me ...

The fund manager who’d taken this breakfast meeting listened to Albert begin his argument but seemed agitated. Then, after only a few minutes he interrupted. “Look,” he gasped, “I know it’s all crazy, but what do you want me to do? If the bubble inflates like this for even one quarter and we don’t participate, we’ll lose half our assets. I’ll be out of a job!” [Highlight added after the fact.] Here was someone who could see the fraud all around him but felt powerless to resist. Bad fund management practice was driving out good.

Reference: http://www.scribd.com/fullscreen/123487201, pp. 157-158, January 2013.

[Side note: This time in history, i.e. May 2013, is a rare instance of a US equity market that is overvalued, overbought, and overbullish, according to quantitative fund manager John Hussman. Its cause, according to many, is QE (quantitative easing). Investors are being driven into risky assets because the yield on safer assets is so low because the yield on US treasuries is so low because the Fed is buying assets to the tune of $85 billion a month in order to encourage economic growth.]

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