Investment Lessons From a Pro...On Twitter
Time for a Thread!
We live in a pretty amazing time. Technology and the platforms that have been built on it have allowed us access to information and insight that wasn’t available 20 years ago. That’s what struck me back in May 2018 when I read a thread on Twitter which was written by Jim O’Shaughnessy who is the Chairman and Co-Chief Investment Officer of OSAM LLC. Jim has written books on investing including the best seller What Works on Wall Street.
Twenty years ago we would not have had access to the thoughts and ideas of a person such as Jim on such a regular basis. Perhaps in the occasional op-ed piece in a national newspaper, a prominent portfolio manager may have shared his or her thoughts but Twitter has some of the most high profile people in finance posting every day.
Given that, I thought it would be a great opportunity to share some of the key points from Jim’s thread and my take on them.
Jim’s Quote: I don’t know how the market will perform this year. I don’t know how the market will perform next year. I don’t know if stocks will be higher or lower in five years. Indeed, even though the probabilities favor a positive outcome, I don’t know if stocks will be higher in 10 yrs.
My Take: Think about this, a person who has had a successful career spanning decades in the investment management business, who has written books on the topic of investing, just told us in a very public forum that he does not know how the market will perform over the next one, five or 10 years. Keep this in mind as the media reports the latest analyst targets for a stock or for the market in general. The analysts don’t know for sure and neither does the person reporting it. This is an odds game, nothing is guaranteed. But, by using a proven and disciplined approach, we can try to tilt the odds in our favor. Even then, success is not guaranteed.
Jim’s Quotes (I actually combined a few here): I know that market corrections are a feature, not a bug, required to get good long-term performance. I do know that during these corrections, there will be a host of “experts” on business TV, blogs, magazines, podcasts and radio warning investors that THIS is the big one. That stocks are heading dramatically lower, and that they should get out now, while they still can. I know that given the way we are constructed, many investors will react emotionally and heed these warnings and sell their holdings, saying they will “wait until the smoke clears” before they return to the market. I know that over time, most of these investors will not return to the market until well after the bottom, usually when stocks have already dramatically increased in value.
My Take: Markets rise and fall, it is perfectly normal. In fact it is essential if we are to earn a return higher than the risk-free rate. No one likes to “live through” a market correction (think about how you felt in March). But the correction paves the way to a recovery. However, the key is to realize that this is a long game and you have to stick to YOUR process. Listening to pundits selling panic and fear at the lows and euphoria at the highs is not a process that is likely to have long-term success.
Jim’s Quotes: I know that as a systematic, rules-based quantitative investor, I can negate my entire track record by just once emotionally overriding my investment models, as many sadly did during the financial crisis. I think I know that no matter how many times you “prove” that we are saddled with a host of behavioral biases that make successful long-term investing an odds-against bet, may people will say they understand but continue to exhibit the biases. I think I know that if I didn’t adhere to an entirely quantitative investment mythology, I would be as likely—maybe MORE likely—to giving into all these behavioral biases.
My Take: Jim tells us that he knows that he is prone to the same biases that impact all of us. These biases can not be eliminated, they are literally in our DNA. But we can recognize that they exist and take measures to control them as much as possible.
Jim’s Quote: I think I know that the majority of active stock market investors—both professional and aficionado—will secretly believe that while these human foibles that make investing hard apply to others, they don’t apply to them.
My Take: We are all prone. Have you ever held a losing position in the HOPE that it will rally back to your entry so that you can break even? I have. Have you ever justified buying a stock that does not fit with your process because you “like the product?” I have. In the face of negative facts that should tell you to close a losing trade, have you searched far and wide for the ONE data point that confirms your bullish view? I have. It is safe to say that most of us are prone to this error in judgement.
Jim’s Quote: Finally, while I think I know that everything I’ve just said is correct, the fact is I can’t know that with certainty and that if history has taught us anything, it’s that the majority of things we currently believe are wrong.
My Take: There is always a chance that you are going to be wrong. The odds of you being wrong are likely larger than you think. Manage your risk and leave yourself an out.
For me this thread from Jim O’Shaughnessy really hit home. We know that investing is making decisions with incomplete information and that investors are overloaded with analysis on a daily basis. Much of it is a reaction to the most recent events. This type of communication plays on our fear and greed emotions and often leads to poor decisions in the absence of a proven repeatable investment strategy.
*A version of this post first appeared on the blog at my company. However, it is timeless and I like to come back to it every few months. The best part is that these lessons can be used anywhere, not just investing.