It was 51 years ago, on August 28, 1963, that Rev. Dr. Martin Luther King, Jr. delivered his famous “I Have a Dream” speech on the steps of the Lincoln Memorial in our nation’s capital as part of the March on Washington for Jobs and Freedom.
Accurate recollection simply doesn’t fit neatly within our gauzy memories of inevitable and inexorable cultural advance. But the Justice Department of President John F. Kennedy had plans to silence any speaker that day if doing so was deemed necessary. Moreover, the Administration had tried to get the organizers of the March to call the whole thing off, the FBI tried to convince people not to come and Americans with a favorable view of the event (and of Dr. King) were heavily outnumbered. Today, most of us willingly acknowledge the evil of legal segregation and are glad that it’s gone. However, as current events in Ferguson, Missouri amply demonstrate, racial divide and discrimination remain very real problems, even though many of us are far too eager to deny or dismiss that reality.
Similarly, the investment world is full of people whose statements about the past are utterly unreliable. They remember selling everything in October of 2007 and going all-in in March of 2009. They remember beating any and all appropriate (and inappropriate) benchmarks quarter after quarter and year after year.
They say what they do despite mountains of evidence suggesting precisely the opposite, both at the institutional and retail levels. Indeed, “24% of funds fall significantly short of their chosen market benchmark and have negative alpha, 75% of funds roughly match the market and have zero alpha, and well under 1% achieve superior results after costs — a number not statistically significantly different from zero.” Among individual investors, “[t]he correlation coefficient between return estimates and realized returns is not distinguishable from zero” (in other words, what we think our investment returns are and what they actually are have absolutely nothing to do with each other).
It’s easy to conclude that liars are essentially everywhere. That may even be true. But I suspect that reality is far more insidious than that. We readily misremember the past, but not necessarily because doing so is self-serving. For example, even well-intentioned eyewitness testimony is highly suspect. Some of the reason for it relates to the narrative fallacy. In the best stories, richness is added by omission. Accordingly, we tend to add our own favored details to enhance the provided narrative and to make it fit more readily with our favored interpretation. Or we remember an event in a way consistent with how things usually happened, even if things didn’t really happen that way. We unwittingly create these false memories, according to Harvard psychologist Daniel Schacter, because our brains are designed to tell stories about the future. Moreover, in part because we like to think of ourselves as basically good and talented people, there is a positivity bias to our memories. Those of us who are old enough recall Dr. King tend to do so in a much more positive light than we saw him back in 1963.
Santayana is famous for having said that “[t]hose who cannot learn from history are doomed to repeat it.” Ironically, what he really said was that “[t]hose who cannot remember the past are condemned to repeat it.” For investors of all stripes, that means putting a system into place such that every trade is recorded, remembered and analyzed and that investment performance is accurately and rigorously measured and recorded. We will need to keep those records close at hand and refer to them often too — something we would prefer not to do when (not if) results (inevitably) don’t go our way. Otherwise, we will keep making the same mistakes over and over even as we boast about how great we are. Doing that would be much more a nightmare than a dream.