How high-performance cars can mean risky business

How high-performance cars can mean risky business

MY FINANCIAL adviser paid me a visit last week. I had long since ceased making the journey to him; there’s no parking near his office anyway but, more to the point, public transport simply won’t do.

Recent visits had been focused on my plans to wind back the real estate portfolio in favour of more liquid and professionally managed investments. It had occurred to me that if I needed cash to refresh the fleet (a near certainty, and soon), it was going to be difficult to sell off a room or two of one of the investment properties to raise the funds. One of the farms has gone, and the second penthouse in the CBD is on the market.

As my bank account grew, my adviser naturally offered to do the professional managing for me, charging a percentage of the value of my assets. But I demurred. I can’t see why the cost of his service should increase just because my wealth rises. We negotiated a retainer acceptable to us both.

So it was last Wednesday morning that I first heard the glorious and unmistakeable sound of a V12 engine in full song in the distance as it approached the estate. I heard it a good three or four minutes before I saw it: a powder-blue Lamborghini Aventador, all 6.5 litres and 544kW of it. Wonderful! But then the horror dawned. My adviser was at the wheel. He extracted himself from the cockpit with a big, stupid grin on his face.

Let’s be honest, the Aventador is a gorgeous vehicle. But I was suddenly reminded of a recent presentation by a leading finance academic that outlined how people who buy high-performance cars exhibit risk-taking behaviour.

Now, there’s nothing wrong with that, per se, and as far as it goes it’s no revelation. And in addition, taking a risk is something you want your manager to do, from time to time. We all know the basic investment rule: the higher the risk you take the higher the return you should get. But we also know that you can’t just keep on taking risk indefinitely and always expect a higher return. The elastic band stretches only so far before it snaps, and the excessive or unwise risk ends in tears.

So I’m not worried about an acceptable level of investment risk. I am, however, concerned about individuals who exhibit risk-seeking behaviour, because that’s something quite different. Risk-seekers take risk for their own gratification. And when it’s my money they’re doing it with, it changes the complexion of the issue. The research suggests that the risk-seeking investment manager takes investment risks, but they are not reflected in the returns they earn for their clients.

The US academic Emeritus Professor of Finance, Stephen Brown, of NYU Stern, examined the cars owned and driven by hedge fund managers in the US and found a link between sports cars, risk-seeking behaviour and poor results for investors. He controlled the data for all sorts of variables  (such as where cars are bought as simple status symbols – you could buy a Maybach, he suggests, which is certainly not a sports car).

There’s a measurement the boffins use to measure how much return an investor gets for the amount of risk they take. It’s called the Sharpe ratio (after Bill Sharpe, the pointy-head who invented it).

Brown says the guys who drive the Lamborghinis, Ferraris, McLarens and so on have significantly lower Sharpe ratios than the managers who drive minivans and Volvos. In other words, the guy who drives the minivan will do a better job of increasing your wealth than the guy who turns up to the front door in the Aventador. A high-performance car is likely to lead to low-performance investing.

I asked the adviser why he’d never told me about the Lamborghini before now, and he responded that I’d never asked him. That rang an alarm bell right away – what if there are other things I need to know but he hasn’t told me because I haven’t asked? And then he mentioned he’d been booked for speeding on the way up – Brown had a few things to say about that, and how it correlates to risk-seeking, too.

I sacked the adviser on the spot, and now I’m looking for a new one. And one of the first questions I’m going to ask is: what cars do you own? I’ll be looking for something Japanese, perhaps, and at least 10 years old, with four doors and two litres. That’s about the sweet spot.