If, as I believe, the small-cap premium is at least partly due to the inherent efficiencies of smaller companies, larger companies have inherent inefficiencies and these inefficiencies will be reflected by the markets. All of which brings me, via circuitous route, to a discussion of Apple. Continue reading
Critics of the financial services industry (often with good reason) frequently remind consumers that financial products are typically “sold” rather than “bought” and implore them not to fall into that trap. The concept here is that financial products are “sold” — pushed upon a consuming public that doesn’t understand them or perhaps even want or need them. Instead, the alleged basis for their continued vibrancy and ongoing sales is that advisors get paid big bucks to sell them.
As I have argued before, it is imperative for consumers to remember the interests of advisors they may be working with and — carefully!— to check their work and analysis. We tend to think of the sales process as about convincing or even pressuring a mark into buying what they don’t want or need. Too often it is that. Far too many advisors do not look out for their clients’ best interests and all of them have an interest in gathering and gaining new clients. But the idea that because people don’t naturally flock to buy something on their own means that it’s dangerous and bad simply doesn’t hold up.
What is good for you and things that have enduring and intrinsic value are sometimes a tough sell. But they are still good and good for you. On the other hand, we often crave what’s bad for us. Parents have a tough time selling healthy food to their kids (and a tough time following their own advice). Local symphonies are struggling to stay afloat while Justin Beiber could support several many times over. And porn is a multi-billion dollar business. Sometimes the stuff we want would be better avoided and the really good stuff needs to be sold. If you don’t believe me, will you believe Steve Jobs? 
“A lot of times, people don’t know what they want until you show it to them.”
This doesn’t mean, of course, that businesses should not listen to their customers or that advisors should not listen to their clients. In the financial world, not listening to clients is a huge problem. Too much financial “advice” is about pitching what the salesman wants to sell rather than listening for and to a client’s dreams, aspirations, goals, circumstances and problems and then going about creating a way to get where they want and/or need to go. Sometimes that advice won’t be what the client wants to hear. Sometimes it will include an approach that the client had never considered. Sometimes it will need to be sold.
Ultimately, a financial advisor’s job is to provide clients what they need — not just what they want. There are plenty of “advisors” who will give their clients what they want. Sometimes doing what’s best for them — providing them with what they truly need — takes a great sales job (and that’s not a bad thing at all).
In the aftermath of the unfortunate death of Steve Jobs, many have highlighted his brilliant 2005 commencement speech at Stanford. I did too. Jobs framed his speech around three stories from his life.
We’re all familiar with how these things are supposed to go. Brilliant business executive explains his success by focusing on his success (it’s far too often a “he”) and encouraging us that we can make it too.
But Steve Jobs was anything but typical.
We all tend to be enamored with success and those that achieve it. We are all prone to what Nassim Taleb calls the “narrative fallacy.” We want to see agency in the world. We want to understand everything in terms of intent, but sometimes (many times) the “cause” is pure noise and worthless as a teacher.
The three stories Jobs chose to focus on at Stanford were difficult, heart-wrenching and painful: dropping out of college; getting fired from Apple in 1985; and being diagnosed with cancer. Success came from them, as Jobs explains, but only much later and after considerable struggle and difficulty. His approach was counterintuitive, but correct. Thus, as usual, Steve Jobs was ahead of the curve.
By spending so much time looking at success, we learn the wrong lessons. It is true, as Taleb concedes, that “chance favors the prepared.” However, as Taleb also points out, those successes have as much to do with randomness and noise as with talent, plan and execution. That’s a major reason why we are such bad forecasters. As a consequence, we should be much more focused on failure than success, consistent with the philosophy of science developed by Karl Popper.
During World War II, England sent regular bombing raids into Germany. Many planes never returned and those that did were often riddled with damage from German anti-aircraft guns and fighters. Wanting to improve survivability, the English Air Ministry examined the locations of the bullet holes on the returned aircraft and proposed that reinforcement be added to those areas that showed the most damage.
The mathematician Abraham Wald, however, suggested otherwise (see his research here or read about it here).
Wald’s unique insight was that the holes from flak and bullets on the bombers that returned represented the areas where planes were able to absorb damage and survive. Since the data showed that there were similar areas on each returning B-29 showing no damage from enemy fire, Wald concluded that those areas (around the main cockpit and the fuel tanks) were the real weak spots and that they must be reinforced.
The more useful data was in the planes that were shot down, not the ones that survived, and had to be “gathered” by induction in that instance. This insight lies behind what we now call survivorship bias – our tendency to include only successes in statistical analysis, skewing the results.
In most cases we’d be better served by looking closely at the stories of those who failed and why instead of the success stories, even though such people are unlikely to get great book contracts and six-figure advances. Similarly, we’d be better served examining our personal investment failures than our successes. That’s where the best data is and where the best insight may be inferred.
As I have noted before, investing is a loser’s game much of the time – with outcomes dominated by luck rather than skill, and high transaction costs. If we avoid mistakes we will generally win. By examining failure more closely, we’ll have a better chance of doing precisely that.
Above the Market 