This investment apartheid relates to the gossip that does the rounds in the City's dealing rooms. It includes the terabytes and petabytes of expensive data that institutions churn to find the quantitative patterns that could lead to superior returns. And - especially contentious - it extends to access to the guys who run listed companies. Whereas institutional investors can rub shoulders with the bosses of UK plc, private investors are left with their noses pressed up against the window pane - only the glass is opaque.
It is understandable that private investors should feel this way - basically because it's true. They don't have the money, the means or the access available to institutional investors; there is no getting away from that. To the extent that this absence equals a lack of information, then - the argument runs - it must leave private investors at a disadvantage. After all, investment is all about having information, processing it and reaching the right conclusion. If you don't have the information in the first place, obviously it's not possible to reach that conclusion.
That private investors should especially feel this inadequacy in relation to company bosses is also understandable. If you are running an equity portfolio - ie, little bits of ownership in a variety of companies - then the boss of a company is very special. He or she comes closer than anyone to being able to shape the make-up and the performance of your portfolio. Admittedly, that may not be so close, but no one - except yourself - is more influential. So you'll want to see every nod and wink the boss makes and hear every off-the-cuff remark uttered.
It should be clear that I am only setting up these notions in order to knock them down. There are three points to make. The first, which addresses private investors' feelings of inferiority, is to do with the misleading nature of much information. That is, people only think information is important because they don't have it. If they do have it, then it tends to influence their judgment badly. This has been observed in many studies. The process runs like this: a little information is very useful but, at an early point in the information-gathering process, there is a peak in the accuracy of predictions based on what's collected. Despite that, confidence in predictions continues to climb with the accumulation of more information and, towards the end of the process, those most richly endowed with information - eg, institutional investors - are the most overconfident about their predictions.
Second - and for proof of that overconfidence - we only need to look at institutional investors' performance. On average, they fail to beat the market indices they track and - after their fees - they lag their markets. True, on a closer examination this is not so much a criticism of institutions as an observation of mathematical necessity. Clearly, all the components of an index are the index so, in aggregate, they can do no better than the index itself even if there are winners and losers. Since institutional investors in effect own all the components then they are bound by the same constraints. But the relevant implication is that, on average, all this excess information that institutions gather does not serve them profitably, so why should private investors covet it?
Third, if information can be so misleading, why should information about – or from – the boss be any different? Why is it deemed so important for investors to meet and to assess the boss? A smooth-talking guy in charge may mean an enhanced reputation and a rising share price. A stumbling performance may mean the opposite. But the effect only lasts so long. Sooner or later, the brute force of corporate performance will be the biggest influence and that will be unrelated to whether the boss is a smoothie or a mumbler.
I recall from my days in the City in the 1980s and early 1990s, I was meeting company bosses - mostly from the consumer sectors - almost daily. Outstanding performers - in their way - were Rick Greenbury of Marks and Spencer (MKS) and Gerald Ratner at Ratners, the forerunner of Signet (SIG). Yet Mr Greenbury is best remembered for presiding over - maybe even stoking - the hubris that crushed Marks, while Mr Ratner almost destroyed Ratners, as it were, over a prawn sandwich. Simultaneously, moderate performers were Ken Morrison at Wm Morrison Supermarkets (MRW) - after all, top businessmen aren't supposed to pad around head office in a Val Doonican sweater - and Garry Weston at Associated British Foods (ABF). Yet these two are now lauded for the heights that ABF reached after Garry Weston's death and the depths to which Morrisons fell after Mr Morrison's departure.
Of course there is the possibility that institutional investors only stress the importance of meeting company bosses because they want to market it as an advantage that they alone possess. Perhaps I'm being too cynical, but the moral is that there is no secret information that private investors lack. Spend less time worrying about that and more time crunching the copious data that is available.
