Greg Mankiw seems
to think quite highly of a speech
that investor Mark Sellers gave to MBA students at Harvard. But although
I’m a writer and Sellers says very nice things about writers,most of what he
has to say rings false to me. On the other hand, his speech does I think reveal
the prejudices of professional investors.
Sellers’s speech is about the qualities needed for someone to be a very successful
professional investor. He has a pretty clear criterion in mind, too: he uses
the phrase "able to compound money at 20% for your entire career"
three times in three paragraphs. Now in general there are two views about people
who fit that bill. The more common view is Sellers’s: that such people are truly
exceptional, that they almost come into the world that way ("by the time
you’re a teenager, if you don’t already have it, you can’t get it," he
writes), and that they share certain traits (Sellers enumerates seven).
The other view, by no means uncommon, is that if you had as many monkeys throwing
darts at stock tables as you have investors trying to beat the market, then
some small number of those monkeys would end up compounding money at 20% for
their entire career.
My view is that someone who has compounded money at 20% for say 15 years straight
is more likely to compound money by 20% this year than, say, the average monkey
with a dartboard. I also think that there probably is some rare skillset which
makes some people particularly good at investing money. But I think it’s incredibly
easy to overstate both effects, and I think that when it comes to trading (as
opposed to investing) strategies, it’s pretty much impossible for any individual
to consistently outperform.
Where I disagree strongly with Sellers is here:
A lot of you will turn out to be good, above average investors because you
are a skewed sample, the Harvard MBAs. A person can learn to be an above-average
investor. You can learn to do well enough, if youíre smart and hard
working and educated, to keep a good, high-paying job in the investment business
for your entire career. You can make millions without being a great investor.
You can learn to outperform the averages by a couple points a year through
hard work and an above-average IQ and a lot of study.
I simply don’t buy it. I don’t see that a Harvard MBA or a high IQ is either
necessary or sufficient to "outperform the averages by a couple points
a year". In fact, all you need in order to outperform the averages by a
couple of points a year is to buy the index and also sell a bunch of out-of-the-money
puts on it. That strategy will work perfectly for many years, until it doesn’t.
(The really gutsy players, of course, wait until the market is in panic mode,
and then start
selling puts.) At the same time, there are many more very bright people
who have lost millions in the stock market than there are very stupid people
who have lost millions in the stock market. Intelligence can be a double-edged
sword.
As for the idea that great investors are also very good writers, I don’t buy
it. (Do you know anybody who’s actually read an entire book by George Soros,
cover to cover?) And then there’s this, which I think is almost self-evidently
false:
A swing up or down over a relatively short time period is not a loss and
therefore not risk, unless you are prone to panicking at the bottom and locking
in the loss.
If Sellers were running Citi or Merrill, I guess, there wouldn’t have been
any write-downs at all: if you’re not selling at a loss, then there
can’t be any losses!
Now Sellers does make some good points along with the weak ones. An MBA won’t
make you a good investor. There’s a big difference between being a contrarian
in theory and being a contrarian in practice. People find it hard to learn from
their mistakes. But he doesn’t make the biggest and most important point of
all: to make money on the buy side, the most important qualification you can
have is to be lucky. The reason he doesn’t say this is because he’s an investor
himself. And I’m sure he’d rather think of himself as particularly skilled than
particularly lucky.