Columnist and former executive editor of The New York Times Bill Keller, who wrote Nelson Mandela’s obituary for the paper last week, was asked by George Stephanopoulos yesterday on ABC’s This Week how Mandela was able to appear so free of hatred. As noted in the obituary, Mandela believed that “leaders cannot afford to hate” because “hating clouds the mind.” Keller offered an intriguing and insightful answer, based upon a good deal of interaction with Mandela. ”That’s not an absence of hate on his part – it’s a surplus of discipline.”
We would be wise to apply this idea to our investment processes (I write this at some risk of trivializing the life and work of Mr. Mandela). We’d all like to make our investment processes immune to the emotional overreactions to which we are all prone. Fear, greed and ego are dangerous taskmasters. But it’s unrealistic to expect that we can somehow turn ourselves into emotionless automatons (and perhaps less than ideal too). The best we can do is to recognize our overly emotional tendencies, to create a disciplined and systematic process, and to follow that process consistently so as to make one’s investment decisions as carefully reasoned and data-driven as possible.
Investing is a probabilistic enterprise. Since certainty is even rarer than high risk-free returns, we’re left trying to make the best decisions we can based upon the knowledge we have. If we do that extremely well, we might be right most of the time, but still a long ways away from all of the time. The improbable — the highly unlikely even – happens and happens surprisingly often.
Take yesterday’s NFL action, for example. More specifically, consider the astonishing Vikings v. Ravens game in snowy Baltimore. Continue reading
Today I offer four fantastic articles for your careful examination, perhaps over the week-end. All are worth your time and attention.
I’ve seen complexity fail over multiple investment cycles in these types of portfolios, but as Keynes told us, “Worldly wisdom teaches that it is better for the reputation to fail conventionally than to succeed unconventionally.” Somehow simplicity has become the exception while complexity is now the rule.
I believe that meeting long-term spending needs for institutional portfolios and controlling risk can be accomplished through simplicity. That’s not to say that it’s easy, just less complex. A complicated portfolio relies on the hope of being smarter than your investing peers and the markets while taking on added risks. We all know hope is not an investment strategy.
Confessions of an Institutional Investor (via Josh Brown)
The world of investing is infinitely complex. It feels like we need complex strategies to generate returns. The problem is that as Adams says complicated systems are more likely to lead to “opportunities for failure.” We cannot control what the markets do. We can however control our own actions. For the vast majority of investors a simple system that we can follow over time will in all likelihood lead to better outcomes.
Simplify your investing to avoid ‘opportunities for failure’ (from Tadas Viskanta)
How many people here think that this bull market, wonderful as it is, is built on a foundation of robust and impressive macroeconomic growth and policy choices that are laying a foundation for impressive growth in the years that lie ahead? And how many think that it’s [built on the Federal Reserve's] printing press? I prefer to play in markets that are priced attractively, priced to offer strong, long-term returns, not ones that are expensive.
Where should you put your money now? From Rob Arnott and others (via Fortune)
Modern day investment management resembles, sadly, another old profession – and I’m not thinking of the oldest one, although there may be parallels there as well. Rather, I’m thinking of ancient alchemy with its near constant promises to turn lead into gold, just as investment managers repeatedly offer to transform low returns into high returns. This raises the question as to why investors/people keep falling for the stories offered up by investment managers/alchemists.
No Silver Bullets in Investing (just old snake oil in new bottles) (from the wonderful James Montier)
Nearly every high school choral organization routinely performs anthems based upon some version of a familiar trope. The piece is designed to be trendy musically, even while being more than a bit late (when I was in school, each had an obligatory “hard rock” section). Meanwhile, the lyrics are an earnest and perhaps cloying ode to the ability of the young to create a better and brighter tomorrow. One such title from my school days was in fact “Hope for the Future.”
Unfortunately, the promise always seems better than the execution.
Despite the enormous (and most often negative) impact that our behavioral and cognitive biases have on our thinking and decision-making, the prevailing view is that we can’t do very much about them. In his famous 1974 Cal Tech commencement address, the great physicist Richard Feynman emphasized the importance of getting the real scoop about things, but lamented how hard it can be to accomplish. “The first principle is that you must not fool yourself – and you are the easiest person to fool.” Even Daniel Kahneman, Nobel laureate, the world’s leading authority on this subject and probably the world’s greatest psychologist, has concluded that we can’t do much to help ourselves in this regard.
But today — maybe — there might just be a tiny glimmer of hope (for the future). Continue reading
I especially like “Bob is doing it.”
Visitors to the National Air and Space Museum in Washington, D.C. got an early Christmas present Tuesday. A single cellist took a seat in the middle of the lobby and began to play. He was soon joined by 120 other members of the United States Air Force Band (full disclosure: my terrific son-in-law, Josh Cullum, is a member).
The musicians filed in gradually from behind museum exhibits and the crowd. They were then joined by brass and vocalists who filled the museum’s second floor balcony. The six-minute performance climaxed with a rousing version of “Joy to the World.” You may find a full list of the Band’s holiday performances in the Washington, D.C. area here.
You may see video of the performance below.
For many years now, institutional investors have consistently tried to follow the lead of the Yale Endowment and its talismanic leader, David Swensen, by investing heavily in illiquid alternative investments such as private equity via hedge fund vehicles. Indeed, the so-called “Yale Model” has been perhaps the primary investment innovation in the institutional space over the past 25 years. But the times they are a-changin’.
“To fail to experience gratitude when walking through the corridors of the Metropolitan Museum, when listening to the music of Bach or Beethoven, when exercising our freedom to speak, or … to give, or withhold, our assent, is to fail to recognize how much we have received from the great wellsprings of human talent and concern that gave us Shakespeare, Abraham Lincoln, Mark Twain, our parents, our friends. We need a rebirth of gratitude for those who have cared for us, living and, mostly, dead. The high moments of our way of life are their gifts to us. We must remember them in our thoughts and in our prayers; and in our deeds.”
― William F. Buckley Jr. (Happy Days Were Here Again)
My first piece for FUNDfire from the Financial Times is now available. Here’s a taste.
Smaller endowments have been rethinking allocations that invest heavily in illiquid alternative investments, and the ones that have pulled back are seeing those decisions pay off. It’s further proof that the so-called “Yale Model” – perhaps the primary investment innovation in the institutional space over the past 25 years – is of limited use to most endowments.
Smaller Endowments Better Off with Fewer Alts
My December Research magazine column is now available online. Here’s a taste.
Innovation in financial planning typically starts with an idea. If enough people (or the right people) think it might be a good idea, it then moves to evidence-gathering for confirmation. But the entire endeavor—designed to try to confirm if the idea makes sense—is inherently prone to confirmation bias. We should be systematically and consistently looking to disprove the idea. Without a devil’s advocate with the specific mission to try to show why the idea is a bad one, without recrimination or criticism for doing so, many bad ideas will seem to be confirmed.
I hope you will read the whole thing.
Who’s the Easiest Person to Fool?