Whatchoo talkin about, Willis?

I won’t bore you with the details of how I got my hands on a computer safe for blogging. Mostly because I haven’t actually managed to. Stupid Toshiba. Astonishingly, hyperlink is deactivated; it won’t let me link to anything properly except with full URLs. Never mind, I will press on, despite the threat of discovery, tapping away at my this, my work laptop. 

Obviously I have been champing at the bit to blog great things at you all this past month or longer, but I want to start with a small, easily disposed of matter, but one which has been bothering me for a while now, and which I cannot let lie. 

I do believe Old TED has bitten the hand that feeds! Can it be that with this post (http://epicureandealmaker.blogspot.com/2008/02/survey-course.html) he is disagreeing with me, me who so skilfully defended his livelihood against the attacked of the baffled, pissed old hacks at the FT? And, Scylla on Charybdis, as he does so he engages in an implicit attack on my livelihood? Well, he does it quite gracefully, so Baruch’s powerful ire remains comfortably in its scabbard, so to speak, but it twitches, TED, it twitches. While I identify something called “”persistence” in a trader’s superior returns” TED writes, he questions whether that persistence, when it comes to portfolio management, is not the outcome of randomness. He goes on: 

are we looking at a dramatic case of survivorship bias, where the most successful (lucky) investors are the few among many that we focus on, send money to, and try to emulate simply because they have been successful? Are these wizards of finance only one or two coin tosses away from failure, ignominy, disgrace?

TED, my dear fellow, I agree that it is certainly possible us buy side investors who are have managed to stay employed are simply the lucky ones as triaged by the annual roll of the dice which is a career in the stock market. However, unless and until someone does a proper study, tracking a set of promising portfolio managers from cradle to grave, as it were, against a control basket of randomly selected clunkers (and assuming those indexed frauds at Vanguard don’t suppress the findings) we just won’t know. 

Now I grant you, unless I accept that my profession and by extension, my professional life, is a Walter Mitty delusion, albeit a lucrative one, I would have to believe that I create value somehow, and that I can continue to create Schmalpha (https://ultimibarbarorum.com/2008/01/26/schmalpha/) for my punters. I agree that I may be biased. But, you know, I DO create value! I really really do! I even have a system and everything, which I thought out about 6 years ago and which I have stuck with ever since, which is all about reducing analytical moving parts, economising on the number of variables which can go wrong. It is philosophically coherent, inspired in equal parts by Karl Popper’s ideas on falsifiability, a Weberian work ethic, and Graham and Dodd. It has worked spectacularly well over the years, and only a deplorable lack of ambition and a spot of bad luck on my part has prevented my becoming a super-duper squillionaire! 

Anyway, that’s what I think, but I still can’t prove it. Anecdotally, I count 2 or 3 incredibly consistent, good investors in my circle of professional friends and acquaintances, and a couple of axe-men on the sell side, whose advice and insight you can generally take to the bank. But again, it might be a self-selecting group we have formed, or we have biased ourselves against those who have dropped out. 

I will never be able to prove it, because proving that persistent returns are not the product of randomness is proving a negative. You can’t actually do it. In the absence of a consistent study (which we know will never take place), no matter how well I and my self-selected circle of friends do in terms of consistent and persistent performance, we can never show that we are not just being (to use a technical term) fluky gits. This, dear old TED, tends to make unfalsifiable the assertion that is all persistent performance is random. And because it is unfalsifiable, I am afraid it is wrong at worst, idle at best, and sort of useless as a base case. So there.


3 thoughts on “Whatchoo talkin about, Willis?”

  1. I think I stumbled on the term ‘Whig History’ about a week after I read ‘Fooled by Randomness’, which was the perfect chance to doubt my chosen career. If I can’t keep believing that stocks will go up, and that well-chosen stocks will go higher, it puts a damper on my career ambition as a value-stock picker.

    On the other hand, Graham & Dodd investing is the style that bears the most similarity to doing actual business, of the cut-your-costs-and-reinvest-for-maximum-return school. And there are too many Carnegie Libraries, not to mention foundations, museums, jobs created, and tax bills paid, for there not to be something to it.

  2. Dear, dear Baruch — Of course I am not biting the hand that feeds. Should I be inclined to do so, I would not be as sleek and well-fed as I undoubtedly am. Consider it instead merely an affectionate nibble.

    I do not think I disagree with you; in fact, my post was largely inspired by your thoughts in Schmalpha. I believe Napoleon’s preference for lucky generals–which you cite approvingly–smacks the nail right on the head. Since we cannot distinguish empirically between skill and luck as the cause of persistent performance, the obviously sensible strategy is to back the guy who consistently puts points on the board and not worry about it.

    However, I am what you might call a skeptical investor. In other words, one who prefers the certainty of losing money by himself to the risk of potentially losing money through someone else’s actions. (A fool, you might say.)

    The point of my articles, obscured as usual by stylistic frippery and analytical fuzzy headedness, is simply a cautionary one. Those who generate consistently positive results (as well as those who do not), being human, cannot help but fall prey to that most common and worrisome of human failings: hubris. This is what I want my readers to worry about, and, hopefully, detect and quash in themselves whenever possible.

    Some might call that foolish, but I have always had a warm spot in my heart for Sisyphean tasks.


  3. The thought of you “affectionately nibbling” my hand is probably a metaphor too far (of course, it depends on what you look like; you may be a beautiful woman) but I take your point.

    What separates hubris from self belief? Because in my business, as a bet-placing principal rather than an agent (to talk your language, see I pay attention even if Martin Wolf doesn’t), I really really NEED to think that all the bets I place will make money, at the time I place them. my id, my limbic system, needs to know I am capable of making a difference even though higher brain functions may be sceptical. Otherwise I do not bet, and no risk, no reward — I become a useless cost centre.

    I have seen what happens when investors lose confidence in themselves, and their investment returns aren’t pretty. Sadly I am aware I have got things wrong, and I know I will in the future. Each time I make an investment I have to have an element of confidence, or if you like, hubris, that I am probabilistically right given the avalable data, and then, in case I am proved wrong, that my NEXT trick is the right one: take that away and I am (sniff) nothing.

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