Logo: Cover page of second edition

How It Came to Be Written

When I – nervously – entered the City from industry in 1974 it took me two years to work out why share-prices fell after good results! The answer is, of course, "expectations". Shares are valued on what people think the future holds — not on what has happened. Investor psychology is a fascinating subject, if only because it is fundamental to an understanding of how to make money in the stock market. Equities are all about guessing other people’s future reactions. In today’s market, these "other people" are almost invariably investment institutions.

As I progressed from investment analysis to fund management (and, in time, to investment banking) I came to realise that I was but a small cog in a gigantic machine dedicated to generating and disseminating these expectations. I dubbed it — purely for my own private purposes — "The Great Expectation Machine". The way it worked intrigued me and still does. Equity markets have changed dramatically since those cosy pre-Big Bang days. But, in essence, the way in which City institutions approach investment and analysts "create" the expectations that fund managers need in order to function has not changed.

In writing this book I set myself the task of explaining in as simple and direct a manner as possible how all the separate but inter-related elements in "the Machine" fit together and work with each other. The large investment institutions (pension funds, insurance companies, unit trusts) are the source of the power that moves the cogwheels and shifts the levers. To an extent that few outside the City appreciate, they dominate the UK (and the US) stock market, both in terms of ownership and activity.

Yet remarkably little has been written about these institutions, about how fund managers invest and the implications of their investment behaviour, on either side of the Atlantic. The average beginner's guide to stock market investment — of which there at least 30 in the UK and literally hundreds in the USA — accords them a passing reference, as if they were peripheral rather than central to the whole process. It is rather like trying to explain the Catholic church in terms of the priesthood, without mentioning the pope, the Vatican and the cardinals! My purpose is not to replicate what many of these books already do extremely well but to build on what they contain. Anyone who has an elementary understanding of the City and its ways should be able to read the text without difficulty.

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