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January 3, 2012

The Editor
Financial Times
1 Southwark Bridge
London
SE1 9HL

Sir,

Your lead editorial of December 30th, “Dangers of market herd stampedes”, begins by succinctly stating the primary reason why the majority of investment managers keep failing their clients. They are rewarded for taking excessive risks and focusing on very short time periods – both contrary to the best interests and explicit preferences of most clients. And, as you imply, this problem has only grown worse with the increasing concentration of the investment management business and with the rise of consultants or “gatekeepers” who insist that the investment managers they recommend, conform to a standard of competing against market indices or pool of other professional managers.

As you point out, the idea that the goal of a money manager is to make money for its clients, rather than lose less than indices or competitors, has been disgracefully discredited and buried. Over a long career as a professional investor, I have found that paying attention to the risk of losing money and thinking about results over a long period, does indeed lead to steady and positive returns for clients, far better than those achieved by market indices, let alone the median professional.

The balance of your editorial about the risk that global stock markets are currently overpriced and in danger of serious declines, illustrates a corollary to taking the risk of loss more seriously. You struggle with the relatively low valuation of recent earnings in equity prices, conceding that this is a point in favor of owning stocks; but counter with the tendency of profit rates to revert to their mean and the likelihood that this will happen soon via a sharp decline in earnings. Any investor intent on avoiding risk of loss, should have taken this argument quite seriously over most of the past five years. And she would have been wrong, at least with regard to any declines in profitability. But, this is precisely the price that a truly long-term and loss-averse investor should be willing to pay to achieve consistent and superior long-run returns. That record high profit margins will ultimately decline is highly probable, when, is as unpredictable as the time we may die; but in neither case is this a good reason not to be prepared.

Robert Zevin

Chairman

Zevin Asset Management,LLC