A few years ago, thanks to my colleague Morgan Housel, I came across an old 1981 speech titled “Trying Too Hard” by investor Dean Williams from Batterymarch Financial Management. It’s a great investing speech – one of the best I’ve seen – and it’s a speech that I’ve revisited many times since I first read it. I say that “Trying Too Hard” is a speech you’ve never heard of because Williams is a really low profile investor. So, I thought it’d be good to share some of my favorite parts of the speech along with my comments, just…
It’s a great investing speech – one of the best I’ve seen – and it’s a speech that I’ve revisited many times since I first read it. I say that “Trying Too Hard” is a speech you’ve never heard of because Williams is a really low profile investor. So, I thought it’d be good to share some of my favorite parts of the speech along with my comments, just so that more people can come to know of it.
On doing too much:
“The title Marshall mentioned, “Trying Too Hard”, comes from something that happened to me a few years ago. I had just completed what I thought was some fancy footwork involving buying and selling a long list of stocks. The oldest member of Morgan’s trust committee looked down the list and said, “Do you think you might be trying too hard?” At the time I thought, “Who ever heard of trying too hard?” Well, over the years I have changed my mind about that.”
There’s evidence that the more you tweak and fiddle with your investments, the worse off you may be.
Finance professors Brad Barber and Terry Odean once looked at the trading records of over 66,000 households in the U.S. for a five year period stretching from 1991 to 1996. What they found was remarkable: The investors who traded the most had generated a return of 11.4% annually while the average household’s annual return was way higher at 16.4%. Like I said, the more you do in investing, the less you may get.
On how causations in finance can be incredibly hard to grasp:
“Here are the ideas I’m going to talk about: the first is an analogy between physics and 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.
That was also the foundation of most of the security analysis, technical analysis, economic theory and forecasting methods you and I learned about when we first began in this business. There were rational and predictable economic forces. And if we just tried hard enough… Earnings and prices and interest rates should all behave in rational and predictable ways. If we just tried hard enough.
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…
…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 financial markets can operate in really weird ways. What seems obvious and predictable on the surface may not actually work at all. Here’s a good example: Economic growth and stock market returns. It seems logical to think that as a country’s economy expands, its stock market should do well too. But, that’s not always true.
An academic study done in 2004 had studied the inflation-adjusted stock market returns and inflation-adjusted GDP (gross domestic product) per capita growth rates for a number of countries from 1900 to 2002. While South Africa’s economy expanded by around 6.5% annually in that period, its stock market had grown by less than 1%. Then, you have Belgium, which saw both its economy and stock market climb by between 1.5% and 2.0%.
Here’s another weird one: The relationship between a commodity’s price and the stock price of its producers. Between the end of September 2005 and 15 September 2015, the price of gold had grown by 10% annually. But over the same timeframe, the S&P / ASX All Ordinaries Gold Index, an index of Australian gold mining stocks, had declined by 4% per year.
Oil is today at a price of around US$40 per barrel, down by over half from a 2014 peak of more than US$100. Many oil & gas stocks around the world have been smashed, including those in Singapore. Some that have been hit particularly hard include Mermaid Maritime Public Company Limited (SGX: DU4), EMAS Offshore Ltd (SGX: UQ4), Swiber Holdings Limited (SGX: BGK), and Nam Cheong Ltd (SGX: N4E); their shares have plunged by at least 64% since the start of 2015.
It may be tempting to think that oil & gas stocks in Singapore can rise in tandem with oil should the commodity’s price start to climb over the next, say, three to five years. But if you are interested in oil & gas stocks here as a play on the possibility of oil prices rising, you may want to think twice. Things in finance are not always easily predictable.
On the power of simplicity and consistency in investing:
“You are familiar with the periodic rankings of past investment results published in Pension & Investment Age. 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 Welsh, who said he’d never heard of Benjamin Graham 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 report his copy of Value-Line and said he bought all the stocks ranked “1” that Merrill Lynch or E.F. Hutton also liked. And when any one of the three changed their ratings, he sold. Mr. Welch said, “It’s like owning a computer. When you get the printout, use the figures to make a decision–not your own impulse.”
The Forbes reporter finally concluded, “His secret isn’t the system but his own consistency.” EXACTLY. That is what Garfield Drew, the market writer, meant forty years ago when he said, “In fact, simplicity or singleness of approach is a greatly underestimated factor of market success.””
I’ve seen first-hand how some investors tend to go for complicated investing situations, thinking that sophisticated analysis is what can give them an edge. But, investing is not a game that dishes out rewards based on the level of difficulty. Simple processes and theses can work beautifully, as Edgerton Welch had demonstrated.
Here’s Williams’ speech again. Go on and take a look. Enjoy.
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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.