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Investment Analysis Clubs / Macro Economic Trends and Risks
|Subject: Begging the Question||Date: 11/17/2012 1:01 PM|
|Author: ADrumlinDaisy||Number: 408778 of 458993|
I am trying to implement some new nomenclature here. We currently have a very simple binary classification system for posts: Off Topic (denoted by “OT”); and everything else (denoted by the absence of “OT”).
I would like to move to a three-part system, where we have (i) fully Off Topic posts, denoted by the acronym “OT” (for, of course, Off Topic, (ii) fully On Topic posts, denoted by the unfortunately identical acronym “OT” (this time for On Topic, and (iii) things in between, denoted by the absence of “OT.” So I have implemented that daring new system with this post.
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Things have been going pretty well recently, so, being Irish, I was feeling melancholy.
I moped around a while, entertaining my son with stories about why nobody today can match Al Kaline or Brooks Robinson, and why those good old days will never return, but it for some reason he seemed uninterested. So I filled a thermos with my Devil’s Brew Hot Chocolate – ground cacao beans, ground coffee beans, a healthy dollop of cayenne pepper, and a plug of tobacco for flavor; no sugar –and headed out to the old sycamore stump.
It was perfect out there. The wind was roaring over the ridge, most of it howling well overhead but the edges plenty strong enough to make the leaves rustle and clatter around me. And it was bone dry, which is rare up here; from its relative warmth (about forty degrees Fahrenheit) I figure the wind must have been heated adiabatically as it blew in from the glacier-mountains of Greenland – sort of like those Santa Ana winds they get out in California, coming down off the high mountains out there.
Well, you can probably figure out what happened next: I pulled out the old harp and started fooling around with “North Country Blues,” weaving the melody in with the leaves and the wind and the coyotes howling at the moon down in the hollow. And it was all pretty much OK, but I got to wondering . . .
Do you think Dylan knew what he was doing with his songs? Did he really think that deeply?
Did he have a plan, implemented through careful composition and painful drafting and redrafting of lyrics? Or did he just sit down and write a song, unleashing some sort of subconscious genius that showed up at such moments and was never evident at any other time? Let’s face it – his songs were acts of rare genius; pretty much everything I ever heard him say in interviews was incoherent and childish.
Is that possible? Can someone act and sound like a lightweight in almost every theatre of life and then suddenly, in some transformative venue, become a genius for the ages?
How about Newton? Malicious and mad --- scarcely able to discern reality from neurotic imaginings – until he sat down and thought about math and science; and then he was suddenly maybe the greatest mind our species has ever produced.
Or Bobby Fischer? One of the worst and craziest human beings that I have ever seen – but there really has never been a chess player like him. He owned chess; he spoke the language, and his greatest contemporaries could only look upon his works and despair.
“Calvin and Hobbes” is so wonderful; so calm and mature and whimsical . . . . Do not read any of Bill Watterson’s introductions, though; he is disappointing -- trivial, prickly and juvenile in prose.
Or, I submit Van Gogh and rest my case.
Where am I going with this? Well actually, I got sidetracked by the combination of “North Country Blues” and a melancholy state of mind. I was originally going to explain why my 88-year-old mother is staying with me (she saw an intruder using a crowbar to pry open her sliding glass door and instead of calling the police grabbed my father’s old rifle off the mantle and fired a couple of shots through the door, raising a whole host of issues). And I had a pretty interesting macroeconomic thought tying right in with that discussion, the kind that just perambulates around until one thing suddenly becomes another thing, and truth reveals itself in a grand and gentle way.
It would have been beautiful and compelling; it would have enriched us all. Unfortunately, I got sidetracked out here on the stump and now I forget what I was going to say. So let’s just follow this other train of thought and see where it takes us. Given my age and short attention span, I do not really have any choice anyway and, as they say, if you can’t fix it, feature it.
So, we were talking about genius and how it sometimes seems to emerge the same way mushrooms do, if you get my drift.
And I wonder if there is any corollary to this in investing.
Let’s start at an oblique angle and work our way into this idea; in fact, let’s start with an act of sacrilege: Do you think that maybe Warren Buffet was just lucky?
OK, relax, breathe; count to 100 using only primes . . . .
Look, suppose we had a million people flipping coins, and we asked each one to do twenty flips. Now, purely statistically, there is a good chance that one person will get 20 heads – maybe some guy in Fresno, for example. And, I am pretty sure that if that were to happen, he would have very good explanations for his success – the angle of his wrist, the starting position of the coin, his vigorous telekinetic push at just the right instant – but of course that is all hooey, right? He was just the lucky one – the one whose existence is predicted by the laws of probability, but whose particular identity cannot be predicted due to the random nature of the circumstances.
(There is a great scam that uses this phenomenon, where a race handicapper will send out, for free, 1,024 emails predicting the outcome of a horse race between two horses. Half will predict Horse A; half will predict Horse B. Then, if Horse A wins, he will send another free prediction, of another race, to the 512 people who received the Horse A prediction for the first race. Half of these 512 people will receive a prediction of Horse C in the second race; half will receive a prediction of Horse D. And he will repeat this process for, say, eight races, after which there will be four people who have received eight straight correct predictions from our hero. He will then offer to sell them his prediction for the next race for $10,000. Assuming everybody bites, and he milks this to the max, he can sell a total of at least seven predictions (more if he hits a lucky streak once he is down to one customer), probably with escalating prices. But he did not know anything; he was just a statistical wizard on the order of Wendy (just checking to see if anyone actually is reading this other than my kids).)
OK, back to our lucky coin-flipper: pretty soon he is featured on CNBC; he gets a nickname (the “Flipper of Fresno”) and a grouchy maverick sidekick named Charlie Curmudgeon, who basks in his reflected glory and writes books that are bought by literally dozens of people. And nobody notices that our hero’s coin-flipping results are pretty darn ordinary once his lucky streak ended – and much of the success that does follow that streak is due to the special flipping deals that he is able to strike based on his reputation.
Now, couldn’t this be possible? After all, do you remember the legendary Bill Miller, who beat the S&P for fifteen straight years – and who then proceeded to lose to the S&P five of the next six years? That sure sounds like a variable governed by the rules of chance.
People have an amazing ability to explain their successes in terms of their ability, foresight and effort, and their failures on the basis of chance, luck, and karma. But maybe, just maybe, it is all – every bit of it – explained by chance, luck and karma.
Who is the smartest guy out there, in terms of investing? I think John Hussman is brilliant. It is hard to imagine someone being smarter than he is. But he is rated as a one-star fund manager by Morningstar – essentially one step above being tarred and feathered and run out of town -- and his performance has been pretty darn weak.
Jeremy Grantham is brilliant, and he has done a lot of very visible things right over the decades, but even his performance is not staggeringly good.
Seth Klarman is brilliant, right? Check out how his recent purchases have done.
Maybe there is no such thing as a genius investor. Maybe the process is so random that the best one can do is avoid dumb mistakes and ride the winds of chance.
Here is an alternative idea, even less attractive: maybe the overtly intelligent investors are like all of the professors scattered around the world who can analyze works of literature until the cows come home, but can’t write anything original that is worth the loss of a tree. Maybe the overtly, obviously intelligent investors are the Salieris of the investing world – intellect, form, precision, and no art, no results other than the random dictates of chance.
And this raises (not “begs,” for the sake of all that is holy) the question of whether there are any investing Mozarts out there – any buffoons who somehow have a genius for investing. After all, the existence of a Salieri does not guarantee the existence of a Mozart.
And, with that introduction, I would like to introduce you to my brother-in-law . . . . Just kidding. I do not know of any natural geniuses in the world of investing. But maybe we should be looking for them!
Well, I do not really have any more to contribute on this topic. I suspect that we all would be better off, on average, just buying some diversified low cost funds (e.g., from the Vanguard family) and doing other things. But I cannot prove it, and if we did that, what would we talk about? Strip away the tightly focused macroeconomic content of this post, for example, and you are lucky if more than 98% of the original post remains.
Not every question has an answer. Sometimes it doesn’t hurt to just let some random thoughts percolate along and see what emerges. Put another way, sometimes you just have to heap up the manure and hope a mushroom emerges.
Anyway, it was getting very cold out there on that stump, and that whole Salieri/Mozart thing was kind of unsatisfying . . . then, for some reason, an old Kris Kristofferson lyric popped into my mind:
there's still a lot of wine and lonely girls
In this best of all possible worlds
And that cheered me up.
Now, I do not want to create a misapprehension; I am happily married and would not at this late stage dally with wine or women, but I still take great comfort in the thought that somewhere out there, just over the horizon, there are winsome lasses waiting to be wooed and fine wine waiting to be savored. Someone else will have to do the wooing and the savoring, but it is, metaphysically speaking, still a fine state of affairs.
And now I think I will wander back inside and build a fire and talk with a certain someone about her itchy trigger finger.
Just another investing day here on the ridge. . . .
A Drumlin Daisy
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