Valuation-Informed Indexing #96
by Rob Bennett
Notes From Schwarzman, Sternlicht, Robert Smith, Mary Callahan Erdoes, Joseph Tsai And Much More From The 2020 Delivering Alpha Conference
The following are rough notes of Stephen Schwarzman, Steve Mnuchin, and Barry Sternlicht's interview from our coverage of the 2020 CNBC Institutional Investor Delivering Alpha Conference. We are posting much more over the next few hours stay tuned. Q2 2020 hedge fund letters, conferences and more One of the most influential investor conferences every year, Read More
You’ve got to be able to point to research to make it in this field. You’ve got to be able to point to numbers to make your point. Tables full of numbers are good. Graphics comparing different numbers always get attention. Numbers, numbers, numbers. Research, research, research. That’s what makes InvestoWorld go ‘round.
Investing is a game of emotions.
I can prove it with numbers!
That’s a joke. But it’s one of those jokes with an important truth at its core.
There is now 30 years of research showing that, if you get valuations right, you will get investing right, even if you drop the ball on everything else. However, if you get valuations wrong, you will get investing wrong, even if you handle everything else perfectly. And, when we talk about valuations, it is investor emotions we are really examining. It is investor emotionalism that causes all overpricing and all underpricing.
The valuations/emotions aspect of the investing project is 80 percent of what matters. And, while it is certainly a good thing that the research shows this to be so, research can take us only so far when we are trying to cope with investor emotionalism.
Research appeals to the brain. The will has primacy over the brain. So long as our emotions direct our wills, all the research in the world will not produce good results.
An investor who has an emotional attachment to Buy-and-Hold strategies can rationalize following them despite mountains of research showing they can never work. It’s the interpretation of research that matters, not the research findings themselves. And interpretation is under the control of the will, not the intellect.
Hundreds of “researchers” continue to produce new research showing that Buy-and-Hold can work. How do they pull off this magic trick? By leaving out valuation adjustments. Why do they leaves out valuation adjustments? Because research that includes them always shows that Buy-and-Hold doesn’t work!
We need a new kind of investment research.
Here’s a piece of “research” that I believe fits the bill — The New Kind of Investment Research
No numbers. No tables. No graphics. Can this really be research?
Words can be research. Words reported on investor emotions can be powerful investing research.
The key to becoming a successful investor is reining in the negative emotions. We cannot always show how that is done with numbers. The trouble with numbers is that people play games with numbers. People who have lost control of their emotions can twist what the numbers say without even being aware that they are doing it so great can be the desperation brought on by an addiction to emotional investing strategies.
Words are not perfect. Words can be twisted too. But there are circumstances in which words can tell a story that numbers cannot tell.
Comment #1 in the article linked to above tells an important story. A community member going by the name “Mephistopheles” says of my posting career at the Vanguard Diehards board (now the Bogleheads Forum): “Rob’s da man! Never in the history of the Diehards forum has one poster, always making civil and well-thought-out posts, managed to irritate so many without anyone being able to articulate a good reason as to why.”
My posts upset Buy-and-Holders. That’s not a good sign for Buy-and-Hold. Investing strategies that cause those who use them to become defensive when challenged will not produce good results in the long run. This comment does not reveal to us precisely what is lacking in the Buy-and-Hold strategy. But it provides evidence that something is indeed lacking.
There are a number of comments in that article that compare a belief in Buy-and-Hold to extreme religious dogmatism. Check out Comment #12, Comment #35, Comment #44, Comment #65, and Comment #78. Buy-and-Hold advocates claim that the strategy is supported by academic research. Academic research and witch burnings don’t mix. To see numerous comments pointing out the dogmatism evident in posts advanced by Buy-and-Holders strongly suggests that the science behind this strategy is not nearly as settled as its advocates try to suggest.
Take a look at Comment #83. “Microlepsis” argues that: The primary way people on this forum can maintain that academic studies support their views, to the exclusion of others, is by simply ignoring contrary studies and/or the ambiguities and limitations of current studies.”
Investors can become convinced of the merits of a strategy by being exposed to a large number of studies that support it so long as the equally large number of studies that cast doubt on its merits are kept from their view. Studies alone can never prove anything because studies put forward in an environment in which questioning is viewed as hostility and is silenced are better characterized as marketing materials than as genuine research. We can only learn how restrictive Buy-and-Hold communities are through the sort of “research” that I am advocating in this column, research that focuses on how real-life investors process the numbers-based sort of investment research.
Consider the point made in Comment #85. “Janey” tells us that she has not personally examined the research said to support Buy-and-Hold. She follows this strategy because it is what the “experts” recommend. If it turned out that the “experts” had a financial incentive to spin the research findings in a particular direction, it might be that millions of Janey’s would be taken in as the result of a naive belief that “experts” would not steer them wrong. You don’t see that sort of point being made in the conventional sorts of investment research.
Finally, look at the point made in Comment #37. “Sirschnitz” examines the group dynamics he sees operating among Buy-and-Holders. You cannot study group dynamics in numbers-based studies. You have to look at how people respond to various arguments or developments. We can do that today by looking at how real-life investors discuss their investing strategies on internet discussion boards. If you believe as I do that the story of investor emotions is 80 percent of the story of investing success or failure, you may see great potential for us to advance our understanding of how stock investing works in the creation and analysis of Post Archives for investing discussion boards.
Numbers reveal important truths. But numbers do not reveal all important truths. We need a new kind of investment research.
Rob Bennett often writes about why stocks crashed. His bio is here.