Richard Feynman’s first principle was that you must not fool yourself - and you are the easiest person to fool. One way we fool ourselves lies in the way we read and absorb news and media stories and what we do with those stories.
I discussed this in our last post, and investment manager Bill Nygren made a similar point in his recent letter to clients(1). This year has been financial media heaven, with bear market, possible recession, and high inflation upon us. "Financial professionals in the media advised investors to act “appropriately.” What that meant went unexplained, but the implication was that, with the market down so much, you need to be more careful."(2) Yet as Bill explains, a careful parsing of 77 years of S&P 500 index data tells a different story. Whether bear market (two years after the index was first down 20%), or recession (two years after a recession was acknowledged), or inflation (two years after inflation topped 8%), the result was similar - in all those scenarios the median two-year index return was positive and extremely healthy. When you examine the data, calls to act appear captive to emotion.
Or take the recent WSJ story about Coltrane Asset Management(3), which successfully shorted growth and tech stocks over the last 18 months. After reading the story one might be tempted to think that that hedge fund selection is about finding the manager who has figured out exactly what will happen next. And you’d certainly come to that conclusion if you just looked at year-to-date performance.
Media (social and professional) tends to reflect what is happening at this very moment. But that may not be helpful for making decisions about the future - at least, not in the way most people think it would. The WSJ story glosses over the fact that more than a few hedge funds suffered (some even closed down and retuned capital to shareholders) after employing similar strategies in recent years when shorting tech/growth also looked compelling. Even for Coltrane the timing was precarious – had the mania gone on much longer it’s likely more investors would have withdrawn capital, forcing the fund to close down. Hedge fund peers such as Eton Park, Tourbillon, and most recently Melvin Capital (caught out in the Gamestop saga) did not fare so well. Concluding that "Coltrane has figured out the market" or "I need to find a hedge fund that can foresee the future" ignores the challenges of what Coltrane has recently accomplished and falls prey to a "cherry picking" bias.
There's a way to read media so we don't fool ourselves. Doing so reminds me how our select investment managers approach the research they review from Wall Street banks and brokers: it's useful for industry background; it may be useful for some company insights; and that’s it. They give NO thought to the bank’s/broker’s recommendation. They simply add the useful information to their mosaic of research to develop their OWN conclusions.
You must not fool yourself. Critical, skeptical, thoughtful consumption of media and information is step one in that endeavor.