Note: I am on vacation this week, so this post may be a
little shorter than average—don't celebrate too much!
I just finished reading The Coddling of the American Mind
by Greg Lukianoff and Jonathan Haidt. It covers some very interesting
topics regarding our country—and our country's children. It received incredible
and well-deserved reviews from all sides of the political spectrum. It was
given to me by a friend, and I threw it on top of my reading stack. I'm glad I
did. Don't worry, this isn't going to be a book review!
One section in particular caught my attention. It was actually built around an observation from Nassim Taleb's excellent book Antifragile (thus the title of this post). Here is the paragraph from Coddling that refers to Antifragile that really got me thinking.
"Taleb opens the book with a poetic
image that should speak to all parents. He notes that wind extinguishes a
candle but energizes a fire. He advises us not to be like candles and not to
turn our children into candles: 'You want to be the fire and wish for the wind.'"
That really struck me. The book talks a lot about how
sometimes playing it safe and being overprotective of our kids may actually inadvertently
cause harm. I think there are some almost prefect analogous takeaways for
portfolio management.
Over the past four weeks or so, I have been discussing the idea that as people who manage money we cannot just hunker down and try to take the least amount of risk possible. We can't just do what we have always done. It wouldn't make sense because if you think about it, we have never really been in a market like this one before. Portfolio management is an iterative process that requires mentoring, thought, and a desire to continually be learning.
Over the past four weeks or so, I have been discussing the idea that as people who manage money we cannot just hunker down and try to take the least amount of risk possible. We can't just do what we have always done. It wouldn't make sense because if you think about it, we have never really been in a market like this one before. Portfolio management is an iterative process that requires mentoring, thought, and a desire to continually be learning.
A
couple of months from now, when I am teaching at the Pacific Coast Bankers
School, I will be working with people who have a hunger to start learning the
techniques. When I think about all the teaching that we have done over the past
25 years, it makes me realize that this effort came to a virtual halt last
year. Sure, there were online classes and video calls with the senior people at
your institutions, but if you were sitting at home doing portfolio management -
who could you bounce your ideas off? Who could you go to for advice and
thoughtful input? If you think about Taleb's incredible word picture above, the
easy thing would have been to become a candle. Many people across the industry were
on their own and the last thing they wanted to do was draw attention to
something new or different. No one was "wishing for the wind" during the
unusual circumstances of operating under pandemic conditions. Now, I think
there can be a real positive here. If most people have, over time, become more
and more like candles, it means that for the few seekers, there must now be
massive opportunities to outperform them. But we must wish for the wind!
It may mean a little extra work.
Last week, I talked briefly about my poker playing and I
think that idea ties in well to this post:
"As someone who likes to play poker, there is a phrase that gets tossed around a lot: "The weak hands need to get flushed out.' What that means to me is that when the 'players' in this great game we call the capital markets—those who have gotten in late or chased yield by selling terrible amounts of option risk—must be forced out. It sounds cruel, but bad decisions need to be punished at some point."
Candle or Fire
The Taleb quote made me consider if I have the weak hand or
the strong hand? Which are you, and how do you know? The thing about poker is
that there will always be an element of luck. A poor player can sometimes flop
a full house or a straight. They shouldn't win, but they do because luck in
cards is such an important factor. However, as I have discussed many times
before, the better players will eventually win—over time—because they know the
odds, they know how to read people, and they remove emotion from their
decision-making.
When dealing with fixed income, luck is not nearly as big of
a factor. Cashflows can be accurately quantified (within a range) and we have
so much more known data. In other words, the dealer is not going to suddenly
flop an ace of spades we didn't know was a possibility. There are unknowns of
course—we don't know which way rates will move, for example—but the variables
can be quantified and assessed. And don't ever forget, we need to block out emotion.
Good investing is not an emotional process. The more we can remove
emotion and feelings from our decision-making, the better. Total side note: you
may not want to practice being completely unemotional and purely logical at
home!
So, what's the point?
In portfolio management, weak hands are weaker and strong hands are stronger. Why? Because strong hands have work behind them, putting in the time and preparation for possible outcomes in advance. The holders of strong hands wish for the wind! Strong hands have the ability and willingness (and eagerness) to explain their decisions to others.
And yet, these hands will not always win the pot. But—strong
hands prepared and played over time will win the long game. The nice thing
about portfolio management is that you can measure its results. You can look
back at decisions and calculate your returns, compare them to those of peers,
and quantify the amount of money your efforts have added to your institution's
bottom line over time.
But if you never measure your performance, how could you
possibly know how you are, and how you have been, doing? I am always
incredulous when I visit with management teams who claim to be doing really
well, and yet have never measured their actual results. I always congratulate
them on their self-assessed success, and then ask them what their performance
numbers had been. Usually, I get blank looks at this. I then try to delicately
ask them how they can make that claim without measurement.
Here is the good news: You can become "the fire," and that
is exciting. The antifragile minority in our field wish for the wind. We should
embrace that possibility but take note that it doesn't come for free. The alternative is to become more and more of
a candle. Becoming a candle may seem like less of a risk, but in the long run,
it would have you fearing the next breeze.
Final, final thought: A good queso is simply so good and
yet, so bad for you. Why, oh why, does that have to be?
Be sure to fill out the form below to subscribe to my weekly blog.
