Gone Camping – Robots, Fraud and Peer to Peer Lending

Most of the posts in this series have been aimed at making you more informed about investment in general. And I take a rather different approach than just putting some charts and tables in front of you that all contain rosy examples.

Before you even start investing I want you to understand a bit more about the risks involved in decision making and how the economic world is wired. And I draw in part from my own experience and knowledge, but also from my own ongoing research which involves a lot of reading.

But I also make a point of attending seminars where I think I can learn something. And that normally means ones where leading investment groups and fund managers also attend hoping to do the same – but where I very rarely meet another financial adviser.

So a few weeks ago I headed off to London to a large tent in the grounds of the HAC (Honorable Artillery Company) to attend the first ‘Camp Alphaville’, hosted by Financial Times Live. Alphaville is, in the FT’s own words, their own ‘irreverent financial blog’ and is part of the online edition of the FT.

(The ‘alpha’ part of the name is what we are supposed to paying fund managers for – investment returns above that expected for the amount of risk taken. Some might call it skill, others luck.)

Large tents sometimes come with clowns inside and proceedings got off to an inauspicious start as two members of the audience started swinging at each other. Why? I have no idea. I initially thought it was a pre-arranged side-show, but no, they had taken a genuine dislike to each other. They clearly hadn’t read the promotional slogan for the event of ‘Peace. Love. Higher Returns’.

After their early eviction, we were left with a variety of investors, strategists, bloggers and policy makers discussing a variety of topics across one main stage and four inflatable ‘igloos’. Most of the speakers were in person, but some appeared in the form of an AwaBot telepresence robot – which is basically a tablet with front facing camera on a movable base, which is controlled by the person on the tablet screen.

I have to say, I think this form of remote control skype on wheels will take a bit of getting used to. One of the robot controllers explained later that one lady, thinking that the screen was just a TV on a stand, used its reflection to adjust her bra – he chose not to say anything and look away. And what if you were enjoying a quiet drink in a bar, when one of these rolls up controlled by your better half and asking when you will be home?

While I may have had some reservations about the AwaBots, they did fit with one of the main themes of the event – how robots could disrupt the labour force. Other leading subjects were China and its outlook, how markets have gone nuts and the rise of digital currencies. And on this last topic, which is very interesting, at times mind-melting and largely about Bitcoin, I’d note that we were asked to bring good old fashioned cash to pay for food and drinks.

My main focus, however, was elsewhere. I was intent on meeting two gentleman from different companies that have had considerable success at spotting fraud at listed companies. I also wanted to attend a debate on peer to peer lending. And I’m pleased to say I managed all three.

Why the interest in fraud? It’s simple, you’ll learn more from those who spot when things go wrong and there are simple lessons to be learned from both Carson Block of Muddy Waters fame and John Hempton of Bronte Capital. Spotting fraud can be a long drawn out and difficult process and there’s no question in my mind they are creating genuine alpha for their investors.

They are very different characters, but they share an understanding to always question the apparent hard facts in front of them, ask themselves constantly are we wrong in some way and perhaps the most glaring point for me, they are used to getting their hands dirty – something one can only hope the economist community does more of.

When I say getting their hands dirty, I mean what you might imagine to be rather simple stuff like tracking the activities of known fraudsters to see where they surface next. Checking the authenticity of published documents or perhaps the credibility of auditors. Looking at the meta-data on published reports to see if dates have been changed and even hiring students to count lorries entering and leaving factories to see if a company really is doing the amount of business they say they are.

Of course, this takes time and costs money and doesn’t fit with an investing world dominated by spreadsheets and a blind trust in theoretical models. And that is why they have an ‘edge’.

But it’s not just about looking for fraud, the same approach is used when investing in companies that others might hate. In an ironic twist John Hempton’s fund has invested in a US drink and food supplement company called Herbalife, which has itself been accused of being a pyramid scheme by a leading hedge fund manager. This is an ongoing situation and you can read about it at length in John Hempton’s blog, which is necessarily a bit technical.

He told me this stock has been his best performer in the past year and as he explains in his blog his edge is that he has made the effort to visit Herbalife distributers and the weight loss classes they hold in several countries and has concluded the business is largely real. He may yet be wrong, legislators in the States may take a different view, but he has been very thorough and well rewarded to date.

Finally, I headed for the debate on peer to peer lending. There are plans by the Treasury to make these direct loans between peers (eg. consumer to consumer), as an eligible ISA investment. And I did get into a bit of a discussion about risk with a board member of one the longest established firms, Zopa. We were a little bit at crossed purposes, but as someone who used to deal with the most complicated forms of corporate debt I was trying to learn as much as I could about how they assessed the risk of their loans. But, I’ll leave much of what I learned for next week.

Please remember:

• past performance is no guide or guarantee of future returns;
• the value of stock market investments can rise and fall over time,  so it is quite possible to get back less than what you put in, depending upon timing