Nobody goes there anymore — it’s too crowded

When I was a young lawyer I got to meet the great Yogi Berra in a professional context. The Hall-of-Fame catcher and former Yankee manager was a delight in every respect.  He was a very insightful and successful businessman too.

As almost everyone knows, Yogi is also extremely quotable. Yogi’s sayings – “Yogi-isms” – have become part of the cultural landscape.  They entertainingly fracture the language but do so in very interesting and sometimes enlightening ways. 

You can observe a lot by watching.

It was déjà vu all over again.   

When you come to a fork in the road….take it. 

The future ain’t what it used to be.

One of my personal favorites is nobody goes there anymore…It’s too crowded. In the trading and investing world, it’s remarkably shrewd advice.  What works today doesn’t necessarily work tomorrow, in large measure because investment success draws crowds of copycats.  That demand – which can readily become excess demand and thus make its object bid-up and too expensive – often means that what was a good trade becomes played out and no longer is a good trade.  If a trade gets too crowded, you don’t want to go there anymore.

As reported by BloombergBusinessweek, this concept was well illustrated (albeit in a different context) during the recent presidential election.  The Obama campaign was extremely successful raising money over the internet, to the tune of $690 million, particularly via the use of email to potential donors.

Lots and lots of email. 

The email appeals used by the campaign were the product of rigorous experimentation by a large team of analysts, said Amelia Showalter, the campaign’s director of digital analytics. “We did extensive A-B testing not just on the subject lines and the amount of money we would ask people for, but on the messages themselves and even the formatting,” Showalter said.  The campaign tested multiple iterations of each email – often as many as 18 variations – before deciding what to blast out to tens of millions of subscribers.  It’s a great metric – test, re-test, quantify, analyze, adjust and target.  All investors should be so disciplined.

“When we saw something that really moved the dial, we would adopt it,” said Toby Fallsgraff, the campaign’s e-mail director, who oversaw a staff of 20 writers.  Interestingly, despite their intensive and extensive experience, the staff was remarkably poor at predicting what would work and what wouldn’t.  Ugly stuff worked.  A casual sound worked.  Profanity worked.  Surprisingly, no matter how much email was sent, very few recipients opted out.  Jon Stewart hilariously lampooned this effort here (“They’ll end up spamming the living s*** out of you!”).

This adaptability is important from an investing standpoint.  We need to be agnostic as to approach and ideology and simply focus on what works and adjust as things change.  Our points of view and opinions, no matter how strongly held, should always be tentative and subject to change due to new or better evidence.  

One reason things change is that trades get crowded and played out.  You can have too much of a good thing, as the Obama campaign found out.  No email was perfect and none kept working indefinitely. “Eventually the novelty wore off, and we had to go back and retest,” Showalter said.

As Felix Salmon recently put it, “anything which works will eventually stop working, and the less intuitive it is, the more quickly it will stop working.”  In a proposition that is both intuitively appealing and academically supported, as more people enter a trade or employ a strategy, the more and the more quickly their success will deteriorate.  As Yogi himself would recognize, it ain’t over ‘til it’s over, but eventually it is over.

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