Shooting Stars…

For all sorts of reasons, although he came up on our radar, we have never advised our clients to invest with Mr Woodford: nor does he feature in any ‘fund of funds’ we have recommended.

Those who have money with Woodford are now stuck with a frozen asset and facing the prospect that, by the time it is fully defrosted there will just be a puddle left. They will all feel the pain of that far more sharply than the past pleasure of feeling a bit more wealthy.

This raises important questions about the inclusion of illiquid assets in daily-traded and supposedly liquid funds and the lack of robust processes or challenges to power and influence.

It also provides yet another example of an individual whose star burns bright but whose triumph ends in disaster.Is there any rational explanation of why brilliant people lose their touch? In his recent article on this very topic, “The Undercover Economist” Tim Harford proposes three broad explanations:

1. Blame the individual: he or she has become lazy/overconfident/isolated from feedback.
2. The world changed: good ideas don’t last forever because the competition catches on.
3. Bad luck: the world is so full of randomness that all outcomes are luck rather than skill.

If true, number 3 is particularly depressing for anyone who thinks they add value with some skill. But examples of it are not difficult to find:

• The wine expert blind-tasting two glasses from the same bottle but pronouncing one to be superior; and
• The pathologist who disagrees with other judgments of the same biopsy, and their own previous judgments of the case.

A further factor identified by Tim Harford is the way in which being contrarian or taking big risks can inflate success: if what most people think is wrong, being against the herd gives you a high chance of dramatic success or spectacular failure.

Only Mr Woodford knows the true explanation, but these are timely reminders to be wary of those who seem to have the Midas touch.