"Pound Cost Averaging"

Another math-y post. I worried about offending those who have no taste for math. My readership is sufficiently small that I cannot reasonably run the chance of turning anyone away. But this did irk me.

The reading today is again taken from the Financial Times. I read a piece by a trader who advocated what he called 'pound cost averaging'. This was his term for buying the same value of, say, shares at regular intervals. He pointed out that this enables one to buy more shares when the price falls, and fewer when the price rises. All very well, I hear you say. But wait, there's more!

He followed this up with an example that made my heart sink. It ran something like this: "Suppose you buy £100 worth of shares in January at £1 per share, then £100 worth of shares in February at £1.50 a share. You end up with 100 shares in Jan and 67 shares in Feb, giving you 167 shares. If, on the other hand, you had spent all £200 at the average price of £1.25, you would only have 160 shares."

I wanted to weep. I have grown accustomed to meeting otherwise very bright people who have forgotten how to do basic arithmetic. But this was in the FT - the newspaper for people interested in money and numbers! The example proved nothing, as examples always don't; the final numbers came out so close that one might suppose the opposite result could be achieved in other circs; and most importantly, it missed a better point.

The point is about the arithmetic-geometric mean inequality. The point is that simple maths helps in simple finance problems, and interesting math helps in interesting finance problems. If the FT doesn't take every chance to illustrate this simple point, who will? (Apart from me.)

Flight to Quality Art

I'm terrifically busy at the moment. Not Productive, but Busy, which everyone knows is quite different. Anyway, for all of the original reasons why I decided to write this in the first place, I thought I'd rather write this than postpone it until I have more time.

The subject for today is something to do with cultural relativism. Maybe by the end of the rant you'll know better what the title ought to be.

Throughout the first stage of the recent global financial crisis, many observers were quick to point out a market trend known as the 'flight to quality'.

This means that investors in each major market moved from investments perceived as riskier into those perceived as safer. For example, you might move out of GM and into Ford; or out of commercial property and into agricultural property; in a more extreme case, out of Argentinian bonds and into US Treasury bonds.

My confusion is about the arbitrary, judgmental use of the word 'quality'. The point is that the 'safer' assets ought to be seen as just that - safer. Most emphatically not better. Indeed, the market ought to price the riskier assets in a way that makes them provide a sufficiently better return to compensate for the extra risk.

Something happened in the art market that looked, to my untrained eye, like the same phenomenon. Prices of 'modern' art (which may be objectively defined!) declined much more sharply than prices of, for example, Renaissance art. Oddly, I never once heard this called a flight to quality.

I followed both discussions in the Financial Times, which should be able to commoditise art as ruthlessly as anything else it discusses. So my question is this: Why are we so afraid to issue judgements on art? Either one can arrive at objective judgements, or one cannot, in which case the market at least reflects the aggregate viewpoint of our society.

Why can't we see the collapse in the market for modern art as a collective judgement by our civilisation, that much of it is of poor quality?