Friday, December 24, 2010

Ratings agencies

Or, why they are somewhere worse than useless.

The investor tries to protect himself from risk by insisting that his money only be put in "safe" investments, but who decides whether they are safe or not? Enter the ratings agencies who then carve up a normal curve of risk into thick histogram buckets with Hoover Dam-like edges.

. . . .

What is more, as the rest of the investor community can see the ratings agency changes coming a mile off, it means that any portfolio changes based on their actions hit a market that has already discounted them, undermining performance even further. But the really magic trick is that it doesn’t matter because performance is measured against a benchmark of similar passive funds that have to follow the same rules! And as a benchmark reflects the average, then on average, they are average. Collect the fees and shrug.


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