“Madness is something rare in individuals — but in groups, parties, peoples, and ages, it is the rule.”
- Friedrich Nietzsche, ‘Beyond Good and Evil’.
Get your Free
financial review
King Charles VI of France died in 1422 after a long rule of more than 40 years. He may have been the first person in history to suffer from a condition known as ‘Glass Delusion’ – the idea that he was made of glass and would break at the slightest touch. He was so concerned by the prospect that he surrounded himself with pillows, and wore special clothes reinforced with iron on the inside. He refused to be touched, in case his body shattered. Princess Alexandra Amelie of Bavaria was a fellow sufferer. She believed that she had somehow swallowed a glass grand piano during her childhood and similarly took great pains to avoid shattering. Scientists today attribute the ‘Glass Delusion’ to the invention of clear glass, which had never been seen before by early sufferers of the condition, and which was regarded by many as magical. The German film director Werner Herzog gave his own take on the subject in ‘Heart of Glass’ in 1976. Set in 18th Century Bavaria, this is a variation on the same theme: when the master glass blower of a Bavarian village dies, he takes the secret of his red ruby glass with him to the grave. Bereft of this magical invention, the village soon goes mad.
‘Glass Delusion’, of course, is no longer common – if it ever was. But we are still prone to outbreaks of irrational belief. A 2011 study from the International Journal of Social Psychiatry indicates that, since 1950, the most common delusion has been in the form of persecution complexes and the belief that we are being spied on*. Given the political developments that have occurred since then, notably the rise of the Cold War and the Surveillance State, feelings of paranoia are understandable. Delusions are not limited to glass: weird and economically suicidal fears about anthropogenic climate change also lurk rent-free in what passes for the brain of Ed Miliband, our Secretary of State for Energy. As Viscount Monckton of Brenchley remarked in February 2023,
“Even if the world moved straight to net zero over 30 years, only 0.2 C° warming would be prevented by 2050. UK net zero on its own would prevent just 1/500th of a degree, at a cost of £3tn for the energy sector alone. Each £1bn spent on net zero would prevent well below a millionth of a degree. Net zero is as unattainable as it is unaffordable.”
But the bottom line is that human beings are prone to irrational belief. How could we be any other way ? As the evolutionary biologist E.O. Wilson magnificently phrased it,
“The real problem of humanity is the following: we have paleolithic emotions; medieval institutions; and god-like technology. And it is terrifically dangerous, and it is now approaching a point of crisis overall.”
The fundamental irrationality of humankind is a particular problem for conventional financial theory, because traditional economics teaches that we are all a version of homo economicus, a logical, rational, calculating agent always analysing what is in our best interests. Even the most cursory study of market behaviour reveals that this cannot be, and has never been, the case. If homo economicus were a real creature and widely prevalent, Black Monday of October 19 1987 – when the Dow Jones Industrial Average shed 23% of its value in a single day – could never have occurred. Nor would we have seen the Wall Street Crash of 1929, or the dotcom boom of the 1990s, or the property bubble of the 2000s, or the incredible rise of bitcoin..
But we did. They all happened. And they happened because we are emotional creatures that tend to herd in our thinking and behaviour, and we tend to understand risk poorly, if at all.
This, in turn, is a problem, because the financial regulator does not necessarily understand risk that well, either. In response to an FT article by John Kay on MIFID II and the Key Information Documents (KIDs) that are now required for all funds, John Hunter, the chairman of the UK Shareholders’ Association, wrote in to the paper as follows:
“Sir, With reference to John Kay’s article “Risk, the retail investor and disastrous new rules” concerning the key information document (Kid) now required under Mifid II: we are sympathetic to attempts to describe financial products in terms that are standardised and clear to less knowledgeable retail investors. But the provisions for the treatment of risk exposed in the article are a disgrace; the ignorance of real-life investment shown despite many years consultation and review is staggering; and the connivance of the advice and fund management industries — which were presumably consulted — is shameful.
“As Professor Kay notes, the Kid equates “risk” entirely with “volatility”. Real investors know that the latter is a minor consideration when investing for the long term. It’s traders who fuss obsessively about volatility, as do all others who make their money out of it (for example corporate advisers, financial services, private equity, specialist fund managers).
“Breathtakingly, the Kid compounds its narrow focus by specifying a precise calculation of “risk” (ie volatility) by replicating the parameters of the last five years as applying to the future. It’s possible the designers have not noticed the advice attached by regulation to all product pitches: ‘Past performance is not a reliable indicator of future results’.
“If uncorrected this Kid will lead to widespread consumer detriment, promote bad advice and bad funds at the expense of good ones, and hamper attempts at consumer education. The regulator should take action immediately to limit the damage.”
John Hunter is absolutely right. Risk is about much more than volatility. If pressed, we would define risk as the possibility of a permanent capital loss, especially if that loss occurs just before the time when the capital is needed for a specific purpose – such as a pension drawdown, the purchase of a house, or the provision of healthcare.
But that is not how the regulator sees it. And it is not how most investment managers see it. Risk is volatility, plain and simple (and wrong). This matters, because how the regulator sees the world tends to trickle down into how wealth managers see the world. (Nobody ever lost their job for slavishly following the diktats of the regulator.) So we now have a wealth management industry that routinely slots its clients’ portfolios into preset risk models with preset asset allocations according to anticipated levels of volatility. The model that has prevailed throughout our career is the so-called ‘60/40’ model, whereby roughly 60% of a clients’ assets are dedicated to equity investments, and roughly 40% to bonds. In turn, those assets will tend to be managed according to a preset benchmark, along the lines of the MSCI World Index (for stocks) and the JP Morgan Global Government Bond Index (for bonds).
We have long highlighted the absurdity of benchmarking for private investors. Equity indices tell us nothing about the future, only about yesterday’s winners. As at July 2025, the US stock market, for example, accounted for 72% of the MSCI World Equity Index. Which means that any fund manager tracking the MSCI World has to have roughly three quarters of his portfolio in US stocks whether he sees any value in that market or not. But the US stock market just happens to be one of the most expensive stock markets in the world right now, driven there by the great bull run that began in 2009, driven largely by Quantitative Easing. Does anyone else see what’s wrong with this picture ?
The problems with bond indexing are, if anything, even more acute. Bond indices tell us literally nothing about the future. Because they are based purely on the size of the market by capitalisation, they simply reflect which bond markets are the largest. Think about that, just for a second. Bond indices simply tell us which governments are the most heavily indebted in absolute terms. But being heavily indebted is precisely the opposite of creditworthiness. Owning bonds in proportion to their biggest issuers is like a bank that will only lend money to its most bankrupt clients. That can last for a while, but it clearly cannot last forever.
Our friend Dan Denning cited Davide Serra of Algebris Investments a while back:
“There is a numbness out there, there is an ambivalence out there that’s concerning…When the next turn comes – and it will come – it’s likely to be more violent than it would otherwise be if we let some pressure off along the way… a crash in the bond market, which is three times the equity market, will feel more painful to the average investor.”
This is yet another reason to be wary of bonds – because the market completely dwarfs that for stocks. A bear market in bonds – which seems already to be upon us – will have implications that few investors are currently prepared for.
*As at August 2025, it is abundantly clear that the foul Starmer regime is indeed spying on all of us.
………….
As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio – with no obligation at all:
Get your Free
financial review
…………
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com.
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and also in systematic trend-following funds.
“Madness is something rare in individuals — but in groups, parties, peoples, and ages, it is the rule.”
Get your Free
financial review
King Charles VI of France died in 1422 after a long rule of more than 40 years. He may have been the first person in history to suffer from a condition known as ‘Glass Delusion’ – the idea that he was made of glass and would break at the slightest touch. He was so concerned by the prospect that he surrounded himself with pillows, and wore special clothes reinforced with iron on the inside. He refused to be touched, in case his body shattered. Princess Alexandra Amelie of Bavaria was a fellow sufferer. She believed that she had somehow swallowed a glass grand piano during her childhood and similarly took great pains to avoid shattering. Scientists today attribute the ‘Glass Delusion’ to the invention of clear glass, which had never been seen before by early sufferers of the condition, and which was regarded by many as magical. The German film director Werner Herzog gave his own take on the subject in ‘Heart of Glass’ in 1976. Set in 18th Century Bavaria, this is a variation on the same theme: when the master glass blower of a Bavarian village dies, he takes the secret of his red ruby glass with him to the grave. Bereft of this magical invention, the village soon goes mad.
‘Glass Delusion’, of course, is no longer common – if it ever was. But we are still prone to outbreaks of irrational belief. A 2011 study from the International Journal of Social Psychiatry indicates that, since 1950, the most common delusion has been in the form of persecution complexes and the belief that we are being spied on*. Given the political developments that have occurred since then, notably the rise of the Cold War and the Surveillance State, feelings of paranoia are understandable. Delusions are not limited to glass: weird and economically suicidal fears about anthropogenic climate change also lurk rent-free in what passes for the brain of Ed Miliband, our Secretary of State for Energy. As Viscount Monckton of Brenchley remarked in February 2023,
“Even if the world moved straight to net zero over 30 years, only 0.2 C° warming would be prevented by 2050. UK net zero on its own would prevent just 1/500th of a degree, at a cost of £3tn for the energy sector alone. Each £1bn spent on net zero would prevent well below a millionth of a degree. Net zero is as unattainable as it is unaffordable.”
But the bottom line is that human beings are prone to irrational belief. How could we be any other way ? As the evolutionary biologist E.O. Wilson magnificently phrased it,
“The real problem of humanity is the following: we have paleolithic emotions; medieval institutions; and god-like technology. And it is terrifically dangerous, and it is now approaching a point of crisis overall.”
The fundamental irrationality of humankind is a particular problem for conventional financial theory, because traditional economics teaches that we are all a version of homo economicus, a logical, rational, calculating agent always analysing what is in our best interests. Even the most cursory study of market behaviour reveals that this cannot be, and has never been, the case. If homo economicus were a real creature and widely prevalent, Black Monday of October 19 1987 – when the Dow Jones Industrial Average shed 23% of its value in a single day – could never have occurred. Nor would we have seen the Wall Street Crash of 1929, or the dotcom boom of the 1990s, or the property bubble of the 2000s, or the incredible rise of bitcoin..
But we did. They all happened. And they happened because we are emotional creatures that tend to herd in our thinking and behaviour, and we tend to understand risk poorly, if at all.
This, in turn, is a problem, because the financial regulator does not necessarily understand risk that well, either. In response to an FT article by John Kay on MIFID II and the Key Information Documents (KIDs) that are now required for all funds, John Hunter, the chairman of the UK Shareholders’ Association, wrote in to the paper as follows:
“Sir, With reference to John Kay’s article “Risk, the retail investor and disastrous new rules” concerning the key information document (Kid) now required under Mifid II: we are sympathetic to attempts to describe financial products in terms that are standardised and clear to less knowledgeable retail investors. But the provisions for the treatment of risk exposed in the article are a disgrace; the ignorance of real-life investment shown despite many years consultation and review is staggering; and the connivance of the advice and fund management industries — which were presumably consulted — is shameful.
“As Professor Kay notes, the Kid equates “risk” entirely with “volatility”. Real investors know that the latter is a minor consideration when investing for the long term. It’s traders who fuss obsessively about volatility, as do all others who make their money out of it (for example corporate advisers, financial services, private equity, specialist fund managers).
“Breathtakingly, the Kid compounds its narrow focus by specifying a precise calculation of “risk” (ie volatility) by replicating the parameters of the last five years as applying to the future. It’s possible the designers have not noticed the advice attached by regulation to all product pitches: ‘Past performance is not a reliable indicator of future results’.
“If uncorrected this Kid will lead to widespread consumer detriment, promote bad advice and bad funds at the expense of good ones, and hamper attempts at consumer education. The regulator should take action immediately to limit the damage.”
John Hunter is absolutely right. Risk is about much more than volatility. If pressed, we would define risk as the possibility of a permanent capital loss, especially if that loss occurs just before the time when the capital is needed for a specific purpose – such as a pension drawdown, the purchase of a house, or the provision of healthcare.
But that is not how the regulator sees it. And it is not how most investment managers see it. Risk is volatility, plain and simple (and wrong). This matters, because how the regulator sees the world tends to trickle down into how wealth managers see the world. (Nobody ever lost their job for slavishly following the diktats of the regulator.) So we now have a wealth management industry that routinely slots its clients’ portfolios into preset risk models with preset asset allocations according to anticipated levels of volatility. The model that has prevailed throughout our career is the so-called ‘60/40’ model, whereby roughly 60% of a clients’ assets are dedicated to equity investments, and roughly 40% to bonds. In turn, those assets will tend to be managed according to a preset benchmark, along the lines of the MSCI World Index (for stocks) and the JP Morgan Global Government Bond Index (for bonds).
We have long highlighted the absurdity of benchmarking for private investors. Equity indices tell us nothing about the future, only about yesterday’s winners. As at July 2025, the US stock market, for example, accounted for 72% of the MSCI World Equity Index. Which means that any fund manager tracking the MSCI World has to have roughly three quarters of his portfolio in US stocks whether he sees any value in that market or not. But the US stock market just happens to be one of the most expensive stock markets in the world right now, driven there by the great bull run that began in 2009, driven largely by Quantitative Easing. Does anyone else see what’s wrong with this picture ?
The problems with bond indexing are, if anything, even more acute. Bond indices tell us literally nothing about the future. Because they are based purely on the size of the market by capitalisation, they simply reflect which bond markets are the largest. Think about that, just for a second. Bond indices simply tell us which governments are the most heavily indebted in absolute terms. But being heavily indebted is precisely the opposite of creditworthiness. Owning bonds in proportion to their biggest issuers is like a bank that will only lend money to its most bankrupt clients. That can last for a while, but it clearly cannot last forever.
Our friend Dan Denning cited Davide Serra of Algebris Investments a while back:
“There is a numbness out there, there is an ambivalence out there that’s concerning…When the next turn comes – and it will come – it’s likely to be more violent than it would otherwise be if we let some pressure off along the way… a crash in the bond market, which is three times the equity market, will feel more painful to the average investor.”
This is yet another reason to be wary of bonds – because the market completely dwarfs that for stocks. A bear market in bonds – which seems already to be upon us – will have implications that few investors are currently prepared for.
*As at August 2025, it is abundantly clear that the foul Starmer regime is indeed spying on all of us.
………….
As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio – with no obligation at all:
Get your Free
financial review
…………
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com.
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and also in systematic trend-following funds.
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