The central truth of the investment business is that investment behavior is driven by career risk. In the professional investment business, we are all agents managing other peoples’ money. The prime directive, as Keynes knew so well, is first and last to keep your job. To do this, he explained that you must never, ever be wrong on your own. To prevent this calamity, professional investors pay ruthless attention to what other investors in general are doing. The great majority “go with the flow,” either completely or partially. This creates herding, or momentum, which drives prices far above or far below fair price. There are many other inefficiencies in market pricing, but this is by far the largest. It is this career risk phenomenon, the fear of not keeping up with your peers or the benchmark within the short time frames that professional investors are inevitably measured, that ultimately can lead to asset bubbles.
Jeremy Grantham argues in this piece that only by embracing career risk and being unafraid to look different from peers and benchmarks, sometimes dramatically so, can one either sidestep dangerous asset bubbles or take full advantage of remarkably cheap assets. The purest version of this philosophy is GMO’s Benchmark-Free Allocation Strategy.