A Blog by Jonathan Low

 

Dec 31, 2015

Does Patience and Discipline Beat Intelligence?

A variation on the folk tale about the tortoise beating the hare. Whether in tech or finance or government or any other human endeavor a variety of traits and factors are required to succeed. Prioritization depends to some degree on the desired outcome - and the strength of the competition.

But as we contemplate the future at the end of yet another year it can be useful to think about what got us here - for good or ill - and whether that will work again. JL

Eddy Elfenbein comments in Crossing Wall Street:

Google searches for housing bubble peaked in August 2005, two years before the crisis began. Even if you get the phenomenon right, there’s still the issue of timing. I would rank patience and discipline above brains.
This time of year is popular for market watchers to make forecasts for the coming year. I try to avoid that game. I like to say that my year-end forecast for the Dow is December 31. Of course, I have the Buy List, but I’m referring to analysts who confidently say that the Dow or the S&P 500 will close next year at some precise level. The most I’ll say is that the math favors or doesn’t favor something. That’s quite a bit different from forecasting the precise close 12 months hence.
Bad news sells, and making dire forecasts is especially popular. In finance, there’s no shortage of people predicting doom and gloom. The problem is that whatever bad news comes along, they claim they were vindicated while conveniently overlooking the other bad stuff they predicted.
I remember one guru who claimed he predicted the financial crisis. To be fair, he did predict a financial collapse, but he predicted the meltdown of civil society. He said chaos would overtake the earth and people would have to turn to drinking rainwater to survive. I don’t recall that happening but those other forecasts get pushed down the memory.
I recently saw the movie, The Big Short. It’s OK, but not outstanding. I give the moviemakers credit for trying to explain some of the complex finance. As such, the movie is unconventional at times. The film centers on Dr. Michael Burry, an eccentric doctor-turned-hedge fund manager who correctly predicted the housing bubble.
The problem is that lots and lots of other people also predicted the housing bubble. Neil Irwin of the New York Times shows that the Google searches for housing bubble peaked in August 2005, two years before the crisis began. Even if you get the phenomenon right, there’s still the issue of timing.
What Dr. Burry got right was the systemic collapse. Burry recently had a rather gloomy outlook for the U.S. I have to say that I don’t find his views very persuasive. That’s the issue I want to get at. Burry is obviously intelligent, but intelligence isn’t the top trait an investor needs to have. I would rank patience and discipline above brains.
But there’s a certain kind of intelligence that can actively hinder investing performance. When you overanalyze too many variables, it often leads to a certain kind of highly intelligent person down the road forecasting disaster. As Wordsworth put it, “lost in a gloom of uninspired research.”
This leads me to one of the most complex and difficult to understand observations about people, and by extension, markets. This complex idea is that people generally find a way to muddle through, especially at the micro level.
Sounds earth-shattering, I know, but lots of smart people don’t get it. The famous guru will identify some terrible event, but they project its impact well out in the future. Instead, people will work around it.
For example, when a snowstorm hits a city, folks in the neighborhood are largely able to get by. They eventually dig themselves out. People look in on their elderly neighbors. Sure, It may not be pleasant, but within time, things slowly return to normal. But the city business or transit system will be complete chaos. That’s the thing. Big breakdowns usually happen at the higher orders (think Katrina). Large systems can freeze up, but people usually don’t.
Dr. Burry was able to see the threats to the system. His eccentric personality probably aided him in connecting all the dots. It’s usually the outsider with marginal views who’s right when all the experts are wrong. But that’s also why the same person will likely be dead wrong with their next 20 predictions. Making forecasts isn’t a skill like shooting free throws where you simply listen to people with better track records.
The Big Short notes that $5 trillion was destroyed by the financial crisis. That’s true, but at Gary Alexander points out, $30 trillion has been created since then.

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