Where the buck stops
The question today is whether investors are better off working alone or are better off with a colleague or group of colleagues. We can add also, whether we are better off with an advisor.
This topic is part of the ever-fascinating issue of the interplay and feedback loops between investors. It’s all about our capacity and need for independent thought and the benefits and drawbacks of collaboration.
This broader issue covers things like herding, groupthink, social proofing, Wisdom of Crowds and Madness of Crowds. Of these, it seems Wisdom of Crowds is the one with little to do with investing and the stock market. I have written about all of these and posts can be found through the tags index on the home page.
Conventional thinking can easily deliver satisfactory results
The answer to today’s query depends on the results we hope to achieve. We can start with a quote from Ben Graham:
“To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.” (Graham, The Intelligent Investor, fourth revised edition. 1973) p. 287.
Satisfactory results can be achieved with an S&P 500 stock index fund. Conventional thinking offers the 60/40 portfolio with 60% stocks and 40% bonds. ETFs can handle this with ease.
Beating satisfactory results by even 2% a year can make a huge difference over time. This is because of the magic of compounding. I have calculated that you can double your earnings in retirement with an extra 2% of compounded returns.
But, as Ben Graham says, it’s harder than it looks. Let’s look at a quote from Philip Fisher to set the scene for our discussion on working alone vs working with colleagues.
Philip Fisher, who was one of the great influences on Warren Buffett’s investing style, points to the “… inherently deceptive nature of the stock market. Doing what everybody else is doing at the moment, and therefore what you have an almost irresistible urge to do, is often the wrong thing to do at all.” (Fisher, Common Stocks and Uncommon Profits and Other Writings. 1958,1996) p.32. (Emphasis added)
The idea here is that to do well you have to go against the grain of the market, be a contrarian. Of course, you also have to be right and not just contrarian for the sake of it.
The question then is whether you can be a more effective contrarian working alone or with colleagues or a committee.
Templeton is clear on this. His Maxim 21 reads: “The best performance is produced by a person and not by a committee.”
The best investment decisions are usually really tough decisions that feel uncomfortable at the time. They are made in face of uncertainty with imperfect information. A good percentage will not work out. And yet someone has to take responsibility.
I’m not sure committees are the best vehicles for such decisions. Groupthink can take hold. Not all contrary opinions are expressed because committee members don’t want to go against an emerging consensus. Because of risks things will not work out, members of a committee will be thinking about how to duck responsibility for bad outcomes.
The trick in investing is to learn from things that don’t turn out well. It is more difficult for a committee than an individual to face and learn from mistakes. Committees can become involved in blame games.
I can understand Templeton’s thinking.
Here’s something I read in a recent Graham and Doddsville Newsletter published recently by Columbia Business School. A successful money manager was being interviewed and said:
“There’s this general belief that having two CIOs running one portfolio strategy can obfuscate decision-making. And in our case, it’s the exact opposite. We think the best way to produce any sort of clarity is through an open conflict of ideas and principles, between people who hold each other with respect and with high regard. And there’s really no limit to this degree of clarity when neither person minds who gets the credit. In a nutshell, that describes the nature of my relationship with Alex.”
He goes on: “Ultimately, Alex and I act as each other’s guardrails in our pursuit of this kind of absolute knowledge. While we share the same investment philosophy, there are many areas where we juxtapose and it’s how we end up complementing each other. In a past life, I am certain that Alex was a credit trader because he is remarkably talented at thinking about what can go wrong in an investment. I was probably an angel investor because I enjoy thinking about what can go right. It’s funny because this filters into the kinds of stocks that we each like to follow. Historically, Alex has been attracted to more mature companies, and I’ve always followed younger, more disruptive businesses. We’ve always felt that by joining these skill sets, we get the luxury of covering a broad and diverse territory for ideas.”
To me this sounds very much like a partnership. It’s a relationship where each has different strengths which complement each other.
I have nothing against collaboration. It might work very well in some situations. I’m all in favour of debating ideas. I’m all in favour of partners not minding who takes the credit. What I have difficulty with is this: who is going to accept responsibility if things don’t turn out? Partners might say, we share the good and the bad. But one can’t help but think that after a bad outcome one of the partner’s might be thinking, ‘I should have followed my own judgement on that one’.
I can’t say much about investment advisors. If the plan is to achieve satisfactory results, the responsibility should lie completely on the advisor’s shoulders. If the ambition is to achieve superior results, the investor needs to be fully engaged, fully educated and accept responsibility for the outcome. I don’t think investment advisors can promise superior returns.
This post has been about investing for superior returns. It’s something that is very hard to achieve. Because of this, I personally believe that one person has to take responsibility for the results of any portfolio. There must be no place to hide.
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