A survey out last week in Institutional Investor’s Alpha magazine showed the salaries of the world’s top hedge-fund managers. I had to read it a few times before I really believed it.
I can just about cope with the idea that tip-top performers might get paid (or pay themselves) say $10m (£5.4m) or $20m a year, but $1.5 billion?
That’s so much money I can’t imagine it as real – the kind of number associated more with waste in the NHS or the annual overpayment of tax credits.
Nonetheless, it is how much James Simons of US-based Renaissance Technologies was paid last year. Simons was the world’s top-paid hedge-fund manager, but he is hardly the only one whose personal bank accounts are awash with cash.
Everyone in the top 25 made more than $130m apiece and in the UK Noam Gottesman and Pierre Lagrange of GLG pocketed $150m each. These are extraordinary numbers and they prompt a good few questions.
What makes all these men (I’m sad to say they are all men) so special? Can the investors in their funds really be getting value when so much is being raked off in charges? Are these charges sustainable? Is it actually possible to spend $1.5 billion if you haven’t got a national health service to run?
However, there is one question that must surely stand out: will these huge pay cheques make their recipients happy?
It would be in nice to think that the answer is ‘yes’, but unfortunately it is more likely to be ‘not really’. If you were to draw a line on a graph representing living standards in the West over the past 30 years you would see that it moved in only one direction – up and up and up.
Yet if you were to do the same for our levels of happiness over the same period you would find it meanders along in more or less a flat line. These days in the West we want for nothing except, it seems, contentment.
Indeed, according to research by Ruut Veenhaven, professor of Happiness Studies at Erasmus University in Rotterdam, the British are significantly less happy than those in much poorer countries such as Malta, Colombia and Ghana.
Veenhaven’s research also shows that those who have an income of less than about $10,000 a year are generally unhappy, but in countries where the average annual income is more than $10,000, money and happiness stop having much of a relationship; those with $100,000 a year are only marginally happier than those with $11,000.
More recently, the idea that money can’t make you happy has been backed up by work from the behavioural-finance guru James Montier of Dresdner Kleinwort Benson.
Montier claimed in a paper last year that once you are making £25,000 a year, making more can’t add much to your happiness levels.
This makes sense. Once your basic needs are covered everything else is not a need but a want. And wants can never be completely satisfied. When our incomes rise, instead of being pleased by our good fortune we just want even more.
When I was a teenager I thought being able to buy a new piece of clothing in Top Shop every few weeks would bring me joy. Now I yearn for pieces by designers stocked only by Selfridges and silly boutiques in Notting Hill. And if I can ever afford limitless numbers of those you can bet your bottom dollar I won’t be satisfied. No, I’ll be wanting couture.
It’s the same with houses. When we buy our first flats we think all our dreams have come true, but it isn’t long before we think we deserve a three-bedroomed house, then a mini-mansion with a properly manicured garden. It is true that with $1.5 billion in the bank you can have whatever kind of house you like but, even so, the evidence suggests that even limitless access to material goods doesn’t necessarily bring joy.
Still there’s a flipside to all this: having money alone, while it may offer peace of mind, is not enough to make you happy – but not having it is clearly enough to make you unhappy.
In the context of investing, this suggests that to most of us not losing money should be much more important than actually making it; losing it will make us unhappy but making it won’t do that much for our contentment levels.
Bring that thought to today’s market and I wonder if most of us wouldn’t be wise to cut our exposure to most asset classes for the rest of the summer.
Equity markets are amazingly volatile: Saudi Arabian stocks have dropped 50% in the past three months, Istanbul stocks fell 20% in May alone, while the FTSE 100 has been gyrating by 200 points a day.
It seems as if the risk of losing money over the next few months is much higher than the chances of making it, particularly given that the last bulwark of the US economy, the consumer, appears to be faltering.
Given that there are good returns to be had from savings accounts (you should be able to get 5%) why not shift into cash and give yourself some peace of mind if not total happiness?
First published in The Sunday Times, 4th June 2006