I was cleaning out some old files – the physical kind – and I ran across one of my favorite investment speeches of all time: “Trying too hard,” by Dean Williams, a Senior Vice President of Batterymarch Financial Management. He gave it at Rockford College in the summer of 1981.
I re-read the speech last night and enjoyed it all over again. It inspired me to write today’s post.
The basic idea is that we investors are trying too hard to do well. And in that effort, we do all kinds of things that don’t really add to our returns. In fact, they work against us. As Williams relates:
“[The title] comes from something that happened to me a few years ago. I had just completed what I thought was some fancy footwork involving buying and selling a long list of stocks. The oldest member of Morgan’s trust committee looked down at the list and said, ‘Do you think you might be trying too hard?’
“At the time, I thought, ‘Who ever heard of trying too hard?’ Well, over the years I’ve changed my mind about that…”
The sobering idea Williams asks us to consider is that maybe our efforts don’t have as much to do with our returns as we think. Of course, all is not lost. He has some good recommendations to make. But before we get to those, let’s think about a few points in his argument…
He says think about the difference between Newtonian physics and quantum physics. In a Newtonian world, there are laws that govern physical events. Rational prediction is possible. Quantum physics, though, suggests we don’t know nearly as much we thought we did. Physical events seem to defy logical explanation in a quantum world. Even the idea of observing and measuring such events without changing them seems impossible.
In a similar way, there is security analysis and then there is what happens in the real world. “There’s just too much evidence,” he says, “that our knowledge of what governs financial and economic events isn’t nearly what we thought it would be.”
I am a big softie for this kind of thing. I wrote a whole book about this idea, called How Do You Know? My answer to my own question was: “You don’t know – not for sure. And you can’t know – not nearly as much as you think you can. But to have an idea about these boundaries is the beginning of wisdom…”
Not knowing where those boundaries are lead people to spend a lot of time doing things they can’t do well. Number one on that list: predicting things. Earnings. Interest rates. Etc. “You can be a successful investors without being a perpetual forecaster,” Williams says. “I can tell you from personal experience that one of the most liberating experiences you can have it to be asked to go over your firm’s economic outlook and to say, ‘We don’t have one.’”
(I must note in passing how many money managers I see giving a lot of space in their annual and quarterly letters to what they think of “the market” and “the economy,” etc. Do they put that stuff in there for the benefit of poorly informed clients? Or do they really believe they add value showing, for the umpteenth time, charts of Shiller’s P/E, debt to GDP and the like? Or do they do it because they just feel like their clients expect them to have a view? I ask the question sincerely.)
(Another aside: Why do so many investors talk about their quarterly returns? It's absurd. Don't do it.)
As Williams says later in his speech: “Give life a try without forecasts. You might even decide, as I have, that a portfolio manager without a forecast is a little like a fish without a bicycle.”
Love that. Here I could cite any number of studies that show the poor record of forecasting the market, or earnings per share, etc. I’m going to assume you’ve seen more than a few of these. I’d rather jump to Williams’ recommendations.
The basic thrust of his recommendation boils down to a few simple ideas: “Spend your time measuring value instead of generating information. Don’t forecast. Buy what’s cheap today. Let other people deal with the odds against predicting the future.”
Specifically, here is a pair of my favorites:
* “Respect the virtues of a simple investment plan.”
We’re easily fooled, but maybe less fooled if we stick with simple. Williams cites a funny experiment where an actor delivers a series of lectures to educated audiences on game theory using a lot of “double talk, meaningless words, false logic, contradictory statements, irrelevant humor, and meaningless references to unrelated topics.”
And yet… he snows them all. The audience thought the lectures were “clear and stimulating.” None of them realized they were pure nonsense. Why? I suspect they allowed complexity to dazzle and they lost their moorings in the simple.
Sadly, this carries over to investing as well. People rate complex research higher than they do research that is simple and clear. 100-page slide decks impress; an easily grasped idea one can express on a napkin, not so much. Yet, as Williams says, “Mastery often expresses itself in simplicity.” Highfalutin language and masses of details may just be a mask for nonsense. Don’t fall for it.
Another one of his recommendations I like:
* You should cultivate “a very special tolerance for the concept of ‘nonsense,’ or what the Zen call “beginner’s mind.”
“I could have saved myself a lot of time if I hadn’t been so quick to label as ‘nonsense’ a lot of ideas I now accept as good sense,” he says. “Expertise is great, but it has a bad side effect. It tends to create an inability to accept new ideas.”
The more we think we know, the more our worldview shrinks if we’re not careful.
As investors, we’ll often seek out the opinion of experts on this or that technology or industry. But sometimes it’s best to come at things as an outsider.
Experts work in well-worn grooves of thought. Rare is the person willing to step outside a settled consensus. Yet, that’s where outperformance often lies.
Batterymarch, by the way, seemed like a pretty cool firm back in the day. Williams talks about how when he joined the firm, Dean LeBaron, the founder, gave him two books that embodied the firm’s beliefs: The Tao of Physics and The Dancing Wu Li Masters. You don’t see these mentioned in preparation for a CFA exam.
You can read Dean Williams’ speech here.
*** A Note on Air Lease and the 737 MAX
Air Lease (AL) is down ~13% in March, presumably over the 737 MAX issues.
The 737 MAX makes up about 5% of AL’s fleet and a decent chunk of its order book. The grounding of the planes does not break the lease. Airlines must still pay. If the airline breaks the lease and is unable to pay, there is a risk AL may not be able to re-lease the plane, especially as governments have grounded the planes for now. I think this is a small risk, and there are only 14 planes.
As to the order book: AL has 28 737 7/8/9/MAX slated for delivery in 2019 out of 78 total. (And many more in the years ahead). There is no further breakout as to how many of those 28 are MAX aircraft. Of course, Boeing’s delay in delivering the aircraft impact AL’s earnings growth in the short-term. You can’t lease an aircraft you don’t have. But longer-term, it doesn’t affect the thesis here. It just pushes some earnings growth out a quarter or two. (That’s a guess, because we don’t know how long it will take Boeing to fix the issue. If resolved quickly, the impact may be negligible).
There aren’t any alternatives to step in and take the MAX’s place. The A320 is the closet rival, but Airbus is likewise backlogged. So, the delay could increase the value of existing aircraft and perhaps boost lease rates. We’ll see.
In any case, if you think further out than a quarter or two, I believe AL is even more compelling now than when I first wrote about it here. The market has over-sold AL in my view. Time will bear out the resilience of AL’s business model. Don’t make this too hard, per Dean Williams above.
Thanks for reading. Write me at info [at] woodlockhousefamilycapital.com
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Published March 14, 2019
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