Just a few weeks ago saw the passing away of Christopher Browne, a founding partner of one of the original value investing houses, Tweedy Browne. Whilst it would be more than fitting to dedicate some lines to this remarkable investor, I feel there are numerous other sources where the interested reader can obtain a thorough account of his achievements.
My reference to Mr Browne, and more precisely to his eponymous firm serves as an introduction to this post’s key point, which is the pivotal role that the concept of patience plays in the investing field. Not so long ago I was quite amused by a quote allegedly uttered by an investing professional as he visited the offices of Tweedy Browne during the interviewing process:
“At most other firms you can tell whether the market is up or down by the noise and atmosphere of the place; at Tweedy you can’t even tell if the markets are open!”
For anyone that has ever had the chance to visit an asset management firm or a trading floor of an investment house, the above affirmation is nothing short of shocking. In fact one only has to tune in to financial news networks such as Bloomberg Television or the hyper-active CNBC, to realise that the prevailing theme is long on action and short on reflection.
Notwithstanding the fact that this rapid-trading, news-a-minute approach can be quite entertaining and at times even thrilling, (remember the classic scene in Oliver Stone’s film, Wall Street, as the hapless Gordon Gecko watches the ticker price of his targeted airline stock rise by the second…), it is a powerful deterrent to successful investment results.
All types of statistical analysis performed by notable investors with enviable track records point in the same direction. Peter Lynch , the legendary and highly successful manager of the Magellan Fund which he ran between 1977 and 1990 returning 29% annually for his investors , once remarked that he calculated that over the same period more than half of the investors in his fun lost money. The reason for this pathetic performance was simply investors chasing performance by pouring into the fund after good quarters and heading for the exits after poor ones.
If these same investors could have refrained from trading in and out of the fund in the related period they would have come up some thousands of dollars richer with no effort and a whole less commissions, fees and tax-related expenses to boot.
All in all, it seems that the lure of the stock market clouds our judgement as investors. Paying undue (or indeed any) attention to the “noise” emanating from short-term pundits ends up handicapping our investment returns. Just as we would not put our house for sale in the market because of a recent newspaper article mentioned a softening of real estate prices in our neighbourhood, we should not let go of our equity holdings when spot prices head south.
As always, it pays to do your own thorough analysis and remain patient whilst price approaches true value rather than letting “Mr Market” decide for you.
“…man's unhappiness springs from one thing alone, his incapacity to stay quietly in one room.”
Blaise Pascal
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Thursday, December 24, 2009
Monday, December 7, 2009
Where are the true contrarians?
How many people do you know that claim to be original, individualistic, in short, to be going against the grain?. I bet there are many, and most of us if asked would include ourselves in this category… After all, there’s nothing unique about just being a part of the crowd and the expression “following the herd” is clearly a pejorative one.
However, by definition, there cannot be many such contrarians or else or they would be the new conforming standard. In any case, and judging by the number of theoretical adherents to this approach, it is surely a laudable quality or at least a fine aspiration. But how does a quick reality check weigh up against this supposed state of affairs? (The one where you and I, and most of our friends and acquaintances are blessed with an innate sense of uniqueness and an urge to challenge the status quo…)
Sad as it is, no matter where you look, it is evident that ours is a society of conforming minds. In the moments of truth, i.e. where decisions of consequence are taken, the vast majority of people will opt for the most trodden path and willnot risk sticking one’s head out above the crowd, lest it be cut off! In fact, the degree to which we are conditioned by the expectations of those around us is difficult to overstate. Albeit with the best intentions in mind, our colleagues, friends and close family will frequently encourage us to limit our decisions and endeavours within our comfort zone.
How frequent is it that a doctor’s son becomes a doctor or a lawyer’s offspring follows the same route as his/her ascendants? Admittedly, if this is the result of a conscious decision on the part of the youngster then so be it, but real experience suggests that, consciously or not, this is rarely the case. At this point the reader may be thinking; well, what’s the big deal? Besides, there’s nothing wrong with accepting a bit of wise advice form our more experienced elders.
Indeed there is not, but when this behaviour is extrapolated to the investment domain, the drawbacks, and ultimately the negative consequences become glaringly obvious. In an arena where the practitioners are, for the most part, highly specialised, thoroughly trained, and of above average intellectual ability, the idea of herd-like mentality is at odds with common-sense. Nonetheless the lack of freethinking, true contrarians in this space is beyond question. Asset management as a profession is almost structurally shielded from the need to apply original thinking. This is hardly surprising when one looks at the incentive system in place, together with the short-term expectations of its participants. For over 90% of mutual funds the greatest risk is not one of underperforming in absolute terms (i.e. have a down year) but rather of delivering results that deviate for a market-wide average proxy such as the S&P 500.
Believe it or not, jobs are lost in investment management when 1-year results trail indexes, irrespective of whether this loss is a “paper one” and it likely might have been the basis of potentially stellar 5 or 10-year results! With this shortsightedness structurally built into the industry, most active funds are merely effecting a “closet-indexing” strategy all while extracting in the meantime “expert” portfolio management fees where no specific investing skill is actually applied!
Simply taking the effort to ignore the advice of the well paid Wall Street analysts whose job is to tout fully-price stocks in cheerleader fashion and in parallel to duly perform some independent research of one’s own, should result in investment returns above those of the conforming majority.
The benefits for those that choose this path are there for all to see (just think how everyone considered Warren Buffet to be “over-it” during the dot-com boom in the late ’90s only to see his wealth increase substantially since then).
However, it takes utmost courage to act out one’s contrarian’s inclinations: I think it was Mason Hawkins of the Longleaf Funds who said it best:
“To succeed in investing over the long run, you must be prepared to look stupid in the short run”
However, by definition, there cannot be many such contrarians or else or they would be the new conforming standard. In any case, and judging by the number of theoretical adherents to this approach, it is surely a laudable quality or at least a fine aspiration. But how does a quick reality check weigh up against this supposed state of affairs? (The one where you and I, and most of our friends and acquaintances are blessed with an innate sense of uniqueness and an urge to challenge the status quo…)
Sad as it is, no matter where you look, it is evident that ours is a society of conforming minds. In the moments of truth, i.e. where decisions of consequence are taken, the vast majority of people will opt for the most trodden path and willnot risk sticking one’s head out above the crowd, lest it be cut off! In fact, the degree to which we are conditioned by the expectations of those around us is difficult to overstate. Albeit with the best intentions in mind, our colleagues, friends and close family will frequently encourage us to limit our decisions and endeavours within our comfort zone.
How frequent is it that a doctor’s son becomes a doctor or a lawyer’s offspring follows the same route as his/her ascendants? Admittedly, if this is the result of a conscious decision on the part of the youngster then so be it, but real experience suggests that, consciously or not, this is rarely the case. At this point the reader may be thinking; well, what’s the big deal? Besides, there’s nothing wrong with accepting a bit of wise advice form our more experienced elders.
Indeed there is not, but when this behaviour is extrapolated to the investment domain, the drawbacks, and ultimately the negative consequences become glaringly obvious. In an arena where the practitioners are, for the most part, highly specialised, thoroughly trained, and of above average intellectual ability, the idea of herd-like mentality is at odds with common-sense. Nonetheless the lack of freethinking, true contrarians in this space is beyond question. Asset management as a profession is almost structurally shielded from the need to apply original thinking. This is hardly surprising when one looks at the incentive system in place, together with the short-term expectations of its participants. For over 90% of mutual funds the greatest risk is not one of underperforming in absolute terms (i.e. have a down year) but rather of delivering results that deviate for a market-wide average proxy such as the S&P 500.
Believe it or not, jobs are lost in investment management when 1-year results trail indexes, irrespective of whether this loss is a “paper one” and it likely might have been the basis of potentially stellar 5 or 10-year results! With this shortsightedness structurally built into the industry, most active funds are merely effecting a “closet-indexing” strategy all while extracting in the meantime “expert” portfolio management fees where no specific investing skill is actually applied!
Simply taking the effort to ignore the advice of the well paid Wall Street analysts whose job is to tout fully-price stocks in cheerleader fashion and in parallel to duly perform some independent research of one’s own, should result in investment returns above those of the conforming majority.
The benefits for those that choose this path are there for all to see (just think how everyone considered Warren Buffet to be “over-it” during the dot-com boom in the late ’90s only to see his wealth increase substantially since then).
However, it takes utmost courage to act out one’s contrarian’s inclinations: I think it was Mason Hawkins of the Longleaf Funds who said it best:
“To succeed in investing over the long run, you must be prepared to look stupid in the short run”
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