Much has already been written about last week’s Evidence Based Investment Conference in NYC. Put on by the fine gentlemen at Ritholtz Wealth Management and IMN, both the speaker and attendee list was a who’s-who of current and upcoming finance (Twitter) celebs. I won’t rehash sessions and speakers here, but if you’re interested, check out:
- Valuewalk did an excellent recap of the full session
- IMN has copies of the presentations available
- Phil Huber has a Twitter recap
- Ben Carlson has his observations
- Corey Hoffstein had a few great takeaways
- Of course Josh did a quick piece too
Part of me is inclined not to bother, but by midway through the day I came to realize there were a few very strong recurring themes that we kept coming back to. Whether it was a pure quant value manager like Wes Gray, a thoughtful writer like Morgan Housel, a legend like Charley Ellis or an author like Larry Swedroe, there were a few consistent core ideas that came out of nearly every mouth.
1) Investors must avoid errors. Of course, this is the core message from Charley Ellis’ famous Winning the Loser’s Game: most investors aren’t beaten by other investors, they beat themselves. Investors make too many decisions, make too complicated of decisions, work too hard trying to outsmart everyone else and convince themselves they are special, when what they should really be doing is simplifying the game. The average investor isn’t Yale’s David Swensen and shouldn’t invest like him. Tom Brakke sat on stage and reminded us that everybody chases performance – investors, advisors, institutions and consultants alike. To quote Charley Ellis, “Being a human being is a terrible characteristic for an investor.” We know what the errors are, but so far we haven’t made avoiding them automatic. Maybe we never will. At a minimum we need to have rules for ourselves set in place before the crisis comes, before our strategy underperforms, or we are absolutely setting ourselves up for failure.
2) Any evidence based-strategy only works in the long term. From Wes Gray‘s hilarious “For something to work, it has to suck” comment to recognition from every single panel member that any strategy is going to underperform, there was widespread agreement that a long-term focus is all that matters. Measuring any single investment strategy over a period of even three years is going to result in disappointment.
Meb: Buffett’s stocks have outperformed 5% a year on average since ’00, but underperformed on average 8/10 years.
— James Osborne, CFP® (@BasonAsset) November 15, 2016
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One of the hardest things for any investor to do is invest in a long-term strategy in a short-term real world. Talking about a 3-4 year period doesn’t sound like that much time in hindsight, but in real time it is a lifetime when your strategy “isn’t working.”
Jokes were made and stories told about hiding investment performance, hiding individual pieces of portfolios, corralling investors into better behavior, convincing people not to pull the plug when the inevitable stretches of underperformance come. Anyone who walked on stage had been through uncomfortably long periods of disappointing performance. Whether you own only the S&P 500 or a rules-based trendfollowing strategy, there has been and will always be a period that you absolutely hate it.
3) Everyone makes tradeoffs for success. I keep finding myself quoting Russ Roberts: “There are no solutions, only tradeoffs.” Investors, advisors and asset managers have to constantly navigate between a theoretical ideal portfolio and the one that a) functions in the real world and b) is one that you can stick with. Wes Gray sat on stage and acknowledged that momentum strategies look much better on paper than a pure momentum strategy can be made to work in real life. We are forced to choose between the ideal and the practical, both for for reasons of market execution and behavioral risk. The “ideal” portfolio on paper might mean owning tiny, near-bankruptcy stocks that don’t track the broad market at all, but how many people could (or would want to!) own such a portfolio? Historically on paper an “ideal” risk-adjusted portfolio might have had 30-40% in commodities and another 30% in emerging markets – how does that sound?
Larry Swedroe told the audience that the best investment strategy is one you can stick with, and advisors do investors a terrible disservice if the client invests in a strategy they don’t fully understand. I’ve talked about this separately – if we do not manage expectations for how a portfolio will behave, we will end up surprised, and surprised people make mistakes. Multiple asset managers acknowledged that keeping clients invested and committed to the strategy matters just as much as the strategy’s viability.
I’m generally no big fan of financial conferences, as most end up being full of useless filler sessions, product pitches and political nonsense. This was truly different. Even if it trended towards the occasional echo-chamber, I’ll take a room full of really smart people agreeing on the broad strokes of successful investing over anything else any day.
Bason Asset Management 