Monday, 25 April 2011

To Be A Better Trader, Try Being Happier.

In my Money Week column this week, I'm looking at how you can become a better trader - just by being happier. Here's a taster.

What makes a successful trader or fund manager? An all-encompassing view of how the global economy is developing? An instinct for a bargain? A fleetness of foot, and the confidence to take bold positions? A willingness to ignore the herd, and buy the stuff everyone else is selling? Or the patience and perseverance of a tortoise?
They are all perfectly reasonable suggestions, and there are many great traders and investors who have made fortunes through one or other of qualities.
But actually the answer may be a lot simpler.
Just try being a bit happier.
According to research released this month by the French business school Insead, the happier people are, the better they are at predicting the future – and the more depressed they are, the worse they are.
The implication is clear, both for banks and fund managers. Just make sure your traders and stock-pickers are cheerful and positive, and their performance will improve. The trouble is, however, they are caught in a classic Catch-22. Everything about the way most people in the financial markets work is guaranteed to make them miserable – and therefore to make them worse at their jobs.
The Insead research provided a fascinating insight into what makes people good at predicting future events – and what makes them bad at it as well. It has long been noted that more cheerful people tend to have a more optimistic view of the future, whilst the more miserable, not very surprisingly, are usually more pessimistic. In the markets, the optimists are usually bulls, while the pessimists are bears.
The Insead study went a lot deeper than that. It took 1,100 people, and asked them to predict the results of games during the 2010 World Cup. They weren’t particularly being optimistic or pessimistic – they weren’t making predictions for their own nations - they were just forecasting what was likely to happen. As an incentive to try and get it right, there was a cash prize for getting it right.
Interestingly, the more depressed the people were, the less likely they were to make accurate predictions. Indeed, many of the most down in the dumps did worse than they would have done just by picking winners from a hat. And they were significantly more likely to make ridiculous predictions, such as forecasting that North Korea would win the whole tournament.
The Insead team is now taking the same methods, and applying then directly to the emotional states of stock and commodity traders. But the implications are already clear enough. If being happy or depressed has a bearing on your ability to forecast the outcome of events, then it follows that happier fund managers or traders will be better at their jobs than their more morose colleagues.
The snag is, how do you influence the happiness of your staff?
Well, in truth, it isn’t that hard.
We have a fairly good understanding of what makes people feel good about life, and what make them depressed. Most of the key points were summarised by the ‘Action for Happiness’ campaign launched earlier this month by Professor Richard Layard, the guru of happiness economics, among others.
Happiness, it turns out, comes down to a few fairly simple things. Do things for other people. Take care of your body. Notice the world around you. Keep learning new things. Be part of something bigger. Have goals to look forward to. They may sound fairly like being in favour of motherhood and apple pie, yet, despite sounding platitudinous, they are certainly likely to make people more balanced and positive, and significantly less likely to suffer bouts of depression.
Here’s the catch, however.
They are not the kind of values promoted within the average bank or fund management firm.
If anything, the financial markets do precisely the opposite of what is likely to make people happy.
They concentrate on paying out huge cash bonuses, usually tied to demanding performance criteria, even though there is very little evidence to suggest that beyond a certain minimum level having more money actually makes people any happier.
They promote a ruthless competition between staff, and between companies, constantly benchmarking their performance against their peers. In fund management, for example, you have failed if you haven’t managed to beat the guy doing the same job at the next fund, even though you may have made plenty of money for your investors. And yet that is only likely to make their staff feel anxious and insecure.
And they promote a relentless short-termism, continually shortening the time to come up with results, even though it is usually far better to concentrate on medium-term performance, and more satisfying for the staff as well.
In short, if they were deliberately setting out to make their traders and stock-pickers depressed, it is hard to see how they could be doing a better job.
But, of course, the more depressed their staff are, the worse they will be at their jobs. In fact, it is a classic Catch-22. To trade well, you have to be happy, but everything about the work is likely to make you depressed, so you’ll end up being a very bad trader – the kind of person who thinks North Korea will win the World Cup, or that oil will be trading back at $20 a barrel by the end of next year.
Is there a way out of that? Perhaps.
Maybe investors should stop looking at all those charts that banks and fund managers love to produce showing how they out-performed their peers over the last there months. And maybe they should stop listening to all those boastful adverts about how the pay of staff is linked to performance.
Instead, just ask if the traders and stock-pickers are cheerful, feeling good about themselves, and are well looked after. Who knows, over the medium-term it might even produce better results.

Monday, 18 April 2011

Great Review Of Shadow Force...from Aus.

There is a great review of Shadow Force from ABC Brisbane in Australia. "It's loud, it's fast and it's extremely aggressive.....Action, adventure and lots of guns combined with an excellent political sub-plot. For teenage boys or simply for those men who don't want to grow up, Shadow Force is a cracking read. Intellectually stimulating it ain't; fantastic fun it most certainly is."

You can read the whole thing here.

How Much Research Is Enough?

Over at the International Thriller Writers site, I'm taking part in a round table on how much research is enough. Here's what I had to say - but take a look at the rest of the discussion.

I think research is one of those things where it helps to have experience. As CE Lawrence quite rightly points out, it is easy for the research to show too much on the page. A writer needs to know their subject, and to have a real feel for it. They need to know their characters as well, and have a real feel for the kinds of things they would think and feel and say as well. But they don’t have to have a text-book knowledge of everything they are writing about.

I suspect that attitudes to research have changed over the years as well. When I was writing ‘Fire Force’, which is a book set amongst mercenaries in Africa, I went back and re-read some of the classics of the genre. For example, I re-read ‘The Dogs of War’ by Frederick Forsyth. I can remember reading it when it came out, when I would have been about ten, and loving it. But today it seems like a really dull book, mainly because there is just too much research in it. The hero spends ages and ages setting up the mission. He regularly travels to Brussels to set up false bank accounts – by train and ferry, for Heaven’s sake, which takes up many pages. He doesn’t even get a plane. In the end, it just makes for what today seems a really dull read.

By contrast, ‘The Da Vinci Code’ is a poorly researched book. There are plenty or mistakes. Indeed, Westminster Abbey in London even had to issue a guidebook for tourists correcting some of the factual errors because so many tourists came in asking about them. But who cares? It’s a really good book – and it certainly sold well.

Thirty years ago, I think people expected thrillers to be very research-driven. But not right now. Today the key is to create your characters, and your story, and then do the research that is necessary to get things right. But this is fiction – its the plot and the people that really count.

Sunday, 17 April 2011

Bust is Shortlisted for Best Business Book....

I'm getting a lot of awards right now. 'Bust' has just been short-listed for the Spear's Book Awards Business Book of the Year award. The results are announced in June. Fingers crossed.


My Bloomberg column has been awarded a prize for best opinion writer by the Society of American Business Writers and Editors.

The Vickers Whitewash....

In this week's Money Week column, I've been looking at the Vickers Report, and how it let the banks off the hook. Here's a taster....

This year, the UK had a Goldilocks moment to get to grips with its over-mighty finance industry. Two years ago, the banks were still too weak. You can’t put a patient in for major heart surgery when they are still recovering from a car crash. In the immediate wake of the credit crunch, the banks could not have survived radical restructuring. And in another two years, the banks will all be making big profits again, paying lots of corporation tax, and paying big donations to political parties. The memory of the credit crunch will have faded, and the political will to break then up will have evaporated.
But right now, the banks are strong enough to take some punishment. And the desire to make sure the events of 2008 are never repeated is still there. As Goldilocks would put it, it is neither too hot nor too cold – but just right.
Despite that, Sir John Vickers and his colleagues on the Independent Banking Commission blew it. Last Monday’s report on the future of the British financial services industry was the dampest possible squib. Its response was so feeble, and so irrelevant, that it now looks the British banks have in effect escaped from the worst series of collapses in a century or more without any meaningful reform to the way they operate.
No one can be in much doubt that Britain’s banking industry is in need of a major structural overhaul. Put simply, this country’s banks have become too big, and too risky, for the size of the economy that ultimately underpins them.
The point was well illustrated in a research note published by UBS last month. Barclays now has a balance sheet worth 100% of GDP. For a comparison, JP Morgan has a balance sheet worth 24% of US GDP. In effect, Britain is host to three very large banks – Barclays, HSBC and Royal Bank of Scotland – each of which has the potential to quite literally bankrupt the country.
We have already seen how Iceland and Ireland were ruined by the recklessness of their financiers. The same could easily happen to this country. It is a threat, and one the Commission had a duty to take seriously.
And yet, probably under the influence of lobbying from the banking industry, it has largely ignored it. The report singles out Lloyds for its main attention – when, in fact, it is the bank that poses the least threat to the stability of the financial system.
Lloyds will be forced to sell off more branches, over and above the 600 the EU is already making it get rid of. It is certainly true that Gordon Brown’s decision to bounced Lloyds into merging with HBOS was one of the former Prime Minister’s many catastrophic mistakes. It ruined a fairly sound bank, and dramatically reduced the competition in the mortgage and savings market. If reducing its size creates some space for new players in the financial services industry that will certainly be a good thing.
Yet, it is crazy to imagine that will make the financial system more stable. There is simply no evidence to suggest that too little competition between the banks is what led up to the credit crunch. Indeed, through 2006 and 2007 there were arguably too many lenders crowding into the British market. They were throwing around self-cert buy-to-let mortgages like confetti. More competition in a market is always a good thing. It creates more choice, and better service, with better prices. But anyone who thinks it is going to make the system safer is simply kidding themselves.
If the Commission was too harsh on Lloyds, it was too soft on RBS, Barclays and HSBC. It proposes stricter capital requirements, and dividing lines between the retail and investment banking units, so that the investment bank can safely be allowed to go bust, whilst the retail arm will be protected.
The trouble is, neither is going to fix the real issues.
The banks didn’t go bust because they had too little capital. A bigger buffer against financial shocks will help, but a reckless bonus system, too many complex products, and mindless expansion into markets they didn’t understand were the underlying causes of the crisis. Would RBS have survived with a couple of percent more capital? Almost certainly not. Neither would any of the other banks.
Nor is ‘ring-fencing’ the banks retails arms going to make a great deal of difference. It is very hard to believe that any kind of structure can be created that will make it certain that a collapse of the investment banking arm won’t bring down the retail bank as well. Bankers are very good at shifting money around a balance sheet. If there is a way of making the retail unit subsidise the rest of the bank, someone will find it and exploit it. For the system to work, you have to believe that the regulators are smarter and more knowledgeable than the people working in the banks – and the chances of that are just about zero.
Vickers had a one-off chance to do something really radical. He should have proposed a complete split between retail and investment banking. The retail banks would be safe, fairly dull institutions, and they could be fully protected by the government from failure. . The investment banks could take all the risks they liked, in much the same way that the hedge funds do, and if they went bust it wouldn’t matter very much to anyone apart from their staff.
Barclays might opt to move to New York. HSBC might decide to go back to Hong Kong, or to Shanghai. But so what? It matters much less than most people suppose whether a bank is domiciled in this country. The Commission had a duty to think seriously about whether it was responsible to host massive banks in the UK. It failed completely. The moment to protect the country from another massive banking collapse has passed – it won’t come again.

London's Great Economic Escape....

In my Money Week column last week, I looked at how London escaped the recession, and what lessons we should learn from that. Here's a taster.

The classic 1960s war film ‘The Great Escape’ was based on the break-out of a group of Allied prisoners from a camp in the town of Zagen, in what was then Germany but is now Poland. But if you wanted to re-make it, with a financial rather than military escape, you’d probably set it in London.
At the height of the credit crunch, everyone was forecasting that London’s economy was doomed. The City, and the ancillary industries that fed off it, would come crashing down to earth. The rich would flee, and the bankers would soon be applying for jobs at MacDonald’s.
It hasn’t happened. The financial services sector has recovered sharply. London has emerged from the recession in better shape than the rest of Britain. Employment is stronger, growth is better, and house prices have bounced back. If anything the gulf between London and rest of the UK has grown wider.
There are important lessons in that. If the rest of the British economy was anything like as strong as London and the South-East, the whole country would be roaring ahead. Instead of talking about re-balancing the UK economy, we should be learning the lessons of London’s success, and trying to get the rest of the country to perform as well as it does.
The figures make it quite clear that, of all the regions in the UK, London and the South-East, have emerged best from the downturn. A CBI report released on Monday showed that financial services firms expanded strongly in the latest quarter. The big banks such as HSBC and Barclays are making huge profits again, and the City is doing well. A study by the London School of Economics, led by Henry Overman, the director of its Spatial Economics Research Centre, concluded that London had comes back stronger from the recession than any other region, and it suffered less in the downturn as well.
For example, London’s income per capita fell by 2.5% between 2008 and 2009, while it fell by 2.9% in England as a whole – and of course London was already a lot richer before the recession began. There were fewer job losses as well. The UK saw peak-to-trough falls in employment of 3.9%, whereas London saw only a 2.6% fall. And house prices bounced back quicker than anywhere else in the country. Indeed, Savills reports that prime London properties grew in value by 5% this year, whilst prices were still stagnant or falling in the rest of the country.
True, London benefited a little from government policy. The Olympics is a massive building project. The bail-out of the banks primarily helped the London economy rather than anywhere else. Against that, the massive run up in government spending did nothing for London. The South-East has far lower government spending as a percentage of the economy than other regions: in Wales for example, state spending accounts for more than 70% of the economy, whereas in the South-East it is around half that, at an estimated 36%. And of course London is harder hit by the tax rises than other parts of Britain – the new 50% rate will hit a lot of Londoners but not many people elsewhere.
In fact, the evidence of the recession is that London and the South-East have a hyper-resilient, hugely competitive economy. What we need to do is try and make the rest of Britain more like London.
There are four important lessons from the capital’s success.
First, and most obviously, London is plugged into the global economy far more than any other part of the UK economy. What happens to the rest of Britain or indeed Europe doesn’t matter that much. London’s bankers, lawyers, consultants and accountants are servicing the BRIC economies more than anything else. Russian and Far Eastern companies are flocking to raise capital on London’s markets, and that means paying lots of expensive fees. London had connected itself into booming markets – not locked itself into declining ones.
Next, London has specialised in professional services, and made itself a world-leader in selling those to the rest of the world. There is a lot of talk about reviving specialist manufacturing or creating other new industries for the UK. But the truth is, we don’t have many sectors where we can compete with Germany on quality, nor where we can compete with Eastern Europe on manufacturing costs. Maybe the best policy would be to recognize where our strengths lie – and get the rest of the country to try and do more of the things that London does so well.
Thirdly, London has a highly-skilled and hyper-flexible labour market. According to the Labour Force Survey, for England as a whole, professional and service occupations were hit less badly by the recession than administrative, trade and basic occupations. That was good for London, since professional occupations account for a larger proportion of its labour force – nearly 50%, compared with under 40% in the Midlands and the North. There was more flexibility on wages as well, partly because bonuses (which go down as well as up) are a bigger part of pay. That helped London’s workers keep their jobs through the downturn.
Finally, the state accounts for a far lower share of the London and South-East economy than it does for the rest of the country. Working for the government may be relatively secure during a recession, and that provides some protection for the regions. But the state sector also has low productivity, low growth, and it doesn’t export anything. It consumes rather than generates wealth – and it is only in London and South-East that it is small enough to allow the rest of the economy to flourish.
Forget everything you read a couple of years ago about how this would be a middle-class recession that hit London harder than anywhere else. It just hasn’t happened. Instead, London is pulling further ahead – and as the government spending cuts start to bite, that will become more and more obvious. But there is nothing that special about London. It is part of the same country as Manchester and Cardiff and Birmingham. If those regions could learn where the capital was doing so well, the UK would be doing a lot better than it is.

Friday, 8 April 2011

Shadow Force In The Northern Echo

There's a great review of Shadow Force in The Northern Echo by Nigel Burton. A few choice quotes.

"IF you're a fan of modern military thrillers you're going to have fun with anything Matt Lynn writes..."

"I'm not ashamed to say that I read Shadow Force in one sitting - starting at 6pm I couldn't put it down until the last page shortly after midnight.

Great stuff.

Saturday, 2 April 2011

Goudhurst Prison Blues

One of my favourite records of all time is the Johnny Cash ‘Live At San Quentin’ album: a set that captures the rugged, outlaw sound of the man to perfection. So I couldn’t help thinking about that as I did my first prison gig a couple of weeks ago.
I wasn’t actually in San Quentin. I was at Goudhurst Prison, which is my local jail down here in Kent. It’s actually set among idyllic English countryside, and is in a pleasant enough old building, but the fact it has barbed wire all around it, and you have to hand in your mobile and show your passport at the door to get in, reminds you that this is indeed a jail.
I resisted the temptation to bounce onto stage saying, “Hello, my name is Matt Lynn’ before kicking into the opening chords of ‘Wanted Man’.
Instead, I just gave a version of my standard library talk, where I chat for a while about where the ideas for the ‘Death Force’ series of books came about, how they get written, how publishing works, and all the usual things that people like authors to talk about.
It was a different audience, however. They were younger, and, of course, all men. Quite a few of them had read the books, and enjoyed them which was gratifying, and the library service had bought some books to give away as a competition prize, which made a nice end to the event. They were more interested in money and contracts than most audiences, and maybe that says something about the kind of people they are.
I was struck by how intelligent most of the men were, and how articulate. Obviously something had gone wrong with their lives to end up in prison, but they were men with a lot of potential.
I came away, as one does from these kind of experiences, thinking about how narrow the line is between the safe, comfortable, easy lives that most of us lead, and the far darker, more troubled routes that some people take.

How People Power Can Curb Bonuses

In my Money Week column this week, I'm looking at how people power may be able to curb bonuses. Here's a taster....

Banking bonuses are like cockroaches. Nobody much likes them. They can do a lot of damage. And short of an all-out nuclear war, they appear to be just about indestructible.
The financial collapse of 2008 didn’t do anything to curb the way the financial sector rewards itself. Nor have the attempts at greater regulation made much progress. Even higher taxes don’t work.
But how about people power?
In Holland, ING was forced to abandon a bonus scheme after a Twitter-led campaign against the bank that threaten to turn into a mass boycott. In France, last year, the former footballer Eric Cantona led a campaign for mass withdrawals from the banks. In this country, the UK Uncut campaign, has achieved a lot of impact with its protests against financial institutions.
In the end, banking pay, like just about anything, needs permission from society. Banks can’t operate unless millions of ordinary people are willing to put money into them, and use them to shift funds around. It may be that only direct action from ordinary people can finally bring the banking industry back under control.
There is little question that financial sector pay has got out of hand. The sector routinely pays its staff rewards that are far and above what other people earn, and which bear little realistic relation either to the success of the banks they work for, or to the contribution they make to the economy.
Just take a look at the latest revelations about pay at The Royal Bank of Scotland. Last month, the bank revealed that it paid out around £1 billion in bonuses. More than a hundred of its staff were paid more than £1 million. And this is despite the fact that RBS went spectacularly bust, is still majority-owned by the tax-payer, and is still losing money. It is far from alone. HSBC revealed that it paid 253 of its staff more than £1 million last year, 89 of them in London. Right across the board, bonuses have bounced straight back to 2007 and 2008 levels.
There is nothing wrong, of course, with people earning lots of money. If they are working hard and creating wealth they deserve it. But all the evidence suggests that the banking industry has become a cartel that operates against the public interest. The banks are too big, they take on too much risk, they require too much in the way of hidden subsidies from the taxpayer, and they pay themselves too generously. According to research by Harry Huizinga, an economics professor at the University of Tilburg in the Netherlands, twelve banks have liabilities of more than $1 trillion, and thirty banks have a ratio of liabilities to GDP in excess of 0.5, meaning in effect that if they go bust they may well bring down the country with them. Furthermore, the same banks pay consistently lower returns to shareholders than banks that are smaller, and less systematically important. In short, the mega banks aren’t very useful to anyone, except for their lavishly paid staff. We’d be better off without them.
But how do we bring them under control? There have been plenty of regulatory initiatives but none of them seem to get anywhere. Governments don’t appear very effective – they are too easily brow-beaten by the argument that the banks are vital for the economy.
But maybe people power can make a difference.
In Holland, ING last week agreed to scrap a bonus scheme that would have paid its chief executive Jan Hommen 1.25 million euros. ING was bailed-out by the Dutch government in 2008, and although it has since re-paid five billion euros of the money it received, there is still another five billion euros to pay back. The sober-minded Dutch objected to the sight of bankers who still owed the government billions paying themselves vast rewards. A Twitter-led campaign mobilised public opinion against the bank. People were threatening mass withdrawals from their accounts, creating the potential for a run on the bank. Although by last week only a few hundred people had taken their money out, it was enough to rattle ING. By the end of last week, it had decided to withdraw its bonus scheme, replacing it with something far more modest.
The footballer Eric Cantona tried something similar in France. At the end of last year, he launched the ‘Bankrun 2010’ campaign. The campaign threatened a mass withdrawal of money from the banks. Tens of thousands of people signed up for the Facebook campaign, in France, Britain, the US and elsewhere. The French banking unions warned of an economic catastrophe if it happened. In the end, the event was a bit of a damp squib. Some accounts were closed. But no banks went out of business. And probably those accounts that were closed were opened up somewhere else a few days later.
Still, there are signs that things are stirring.
There is no question that ordinary people feel deeply uneasy about the way that the financial sector rewards itself. They don’t buy into the argument that the banks are engaged in a fierce war for talent that means they have to pay everyone huge salaries. And they suspect, almost certainly correctly, that the way the banks reward themselves makes the system more risky, not less – and that they may have to end up paying for it.
Most of all, they feel powerless to do very much about it. But that, of course, isn’t really true. A bank such as RBS depends on its millions of retail depositors. Without them, it would be sunk. A pure investment bank depends less on ordinary customers, but there are not many of those left – and, in truth, the retail banks are the original source of the money the investment bankers play with.
The Cantona campaign didn’t work. But the ING protest was far more successful. And if the idea of depositors mobilising against banks take off, it could pose the most potent threat yet to the system. After all, for any bank there is nothing scarier than a run. Regulation won’t curb bonuses. It is unlikely that politicians or central bankers will manage to either. But people power might just do the trick.