Dean Williams is an investor not many may have heard of. I don’t know too much about him too, except for the fact that he was part of the investment firm Batterymarch Financial Management in the early 1980s. In 1981, Williams gave a speech at the Financial Analysts Federation Seminar at Rockford College titled “Trying Too Hard.” It’s one of the best and most enjoyable investing speeches I’ve read so far. Here are three of my favourite lessons I had picked up from Williams’ speech, with my own added emphases given in italics. 1. On how murky causations can…
Dean Williams is an investor not many may have heard of. I don’t know too much about him too, except for the fact that he was part of the investment firm Batterymarch Financial Management in the early 1980s.
In 1981, Williams gave a speech at the Financial Analysts Federation Seminar at Rockford College titled “Trying Too Hard.” It’s one of the best and most enjoyable investing speeches I’ve read so far.
Here are three of my favourite lessons I had picked up from Williams’ speech, with my own added emphases given in italics.
1. On how murky causations can be in the world of investing
“The foundation of Newtonian physics was that physical events are governed by physical laws. Laws that we could understand rationally. And if we learned enough about those laws, we could extend our knowledge and influence over our environment…
…In the last fifty years a new physics came along. Quantum, or subatomic physics. The clues it left along its trail frustrated the best scientific minds in the world. Evidence began to mount that our knowledge of what governed events on the subatomic level wasn’t nearly what we thought it would be.
Those events just didn’t seem subject to rational behavior or prediction. Soon it wasn’t clear whether it was even possible to observe and measure subatomic events, or whether the observing and measuring were, themselves, changing or even causing those events.
What I have to tell you tonight is that the investment world I think I know anything about is a lot more like quantum physics than it is like Newtonian physics. There is just too much evidence that our knowledge of what governs financial and economic events isn’t nearly what we thought it would be.”
The world of finance and investing is much like quantum physics. What might be intuitively predictable can often turn out to not be true. Investors got a taste of that over the past few years with interest rates in the US.
The Federal Reserve in the United States had started its bond-purchase programme, Quantitative Easing, back in 2008 and the general idea at that time was that interest rates would rise when QE stopped since the Fed’s massive buying presence would no longer be around.
QE officially ended in late 2014, but from its inception till then, the Fed had stopped and restarted QE on a number of occasions. My colleague Morgan Housel had showed that, contrary to the general idea, interest rates had rose every single time the Fed had stopped QE in the five years between the start of 2008 and April 2013.
As investor Howard Marks likes to say, “One thing you can never be sure of in the investment world is <if A then B>. Processes and linkages are not always predictable.” That’s quantum physics for you.
2. On the futility of making forecasts
“One of the most consuming uses of our time, in fact, has been accumulating information to help us make forecasts of all those things we think we have to predict. Where’s the evidence that it works? I’ve been looking for it. Really.
Here are my conclusions: Confidence in a forecast rises with the amount of information that goes into it. But the accuracy of the forecast stays the same. And when it comes to forecasting—as opposed to doing something—a lot of expertise is no better than a little expertise. And may even be worse.
The consolation prize is pretty consoling, actually. It’s that you can be a successful investor without being a perpetual forecaster.”
It’s easy to think that successful investing entails the need to successfully predict what the economy or the stock market is going to do. But that can’t be further from the truth. Thing is, investors can do well in investing simply by focusing on the present value of a company and ensure that they’ve given themselves plenty of room for error.
We can go back to the start of 2009 for an idea of how that might work. Back then, Singapore’s market barometer the Straits Times Index (SGX: ^STI) was trading at around 1,800 points and was valued at just 6 times its trailing earnings.
At that level, the index could still have been a decent investment even if its earnings didn’t grow or Singapore’s economy stumbled further. That’s especially so when we consider that the index’s long run average price-to-earnings (PE) ratio had been around 17.
Today, the Straits Times Index is up more than 80% to 3,300 points and investors who had bought into it through the SPDR STI ETF (SGX: ES3) – an exchange-traded fund tracking the index – would have been able to reap the rewards.
3. On how simple approaches can win in investing
“You may have missed the news that for the last ten years the best investment record in the country belonged to the Citizens Bank and Trust Company of Chillicothe, Missouri. Forbes magazine did not miss it, though, and sent a reporter to Chillicothe to find the genius responsible for it.
He found a 72 year old man named Edgerton Welch, who said he’d never heard of Benjamin Graham [the dean of value investing] and didn’t have any idea what modern portfolio theory was. “Well, how did you do it?” the reporter wanted to know.
Mr. Welch showed the reporter his copy of Value-Line [a newsletter that helps rank stocks according to their cheapness] and said he bought all the stocks ranked “1” [the cheapest stocks] that Merrill Lynch or E.F. Hutton also liked. And when any one of the three changed their ratings, he sold.”
Edgerton Welch’s story is one of the best I’ve heard in investing. I’ve not been able to find out what happened to Welch’s track record after 1981 and thus verify if he was merely lucky or if there was indeed something more to his system.
But, it’s still worth noting the lesson behind his experience: There was nothing fancy or complicated behind his success; he merely picked a simple idea that has been known to work – buying cheap stocks – and stuck with it faithfully. There’s a lot we can learn from that.
If any of you do know more about Williams or Welch, please drop a comment below. I’d love to hear from you! Also, if you like what you've seen and would like to have access to even more investing analyses, sign up now for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any companies mentioned.