“It’s Not Greed And Fear That Drives The Investment World; It’s Envy” via MebFaber
Guest: Eric Crittenden. Eric is the Chief Investment Officer of Longboard Asset Management. He brings nearly two decades of experience in disciplined, rules-based investment strategies to his position. Eric drives Longboard’s focus on offering high-quality alternative mutual funds that seek to deliver long-term results. Numerous publications have cited his research on trend following investment strategies, including The Journal of Finance.
Topics: Episode 14 is easily one of our most interesting so far. While there’s great content about trend following, Eric and Meb also delve into the psychological side of investing. There’s a fascinating tension between what people say they want from investing, versus what they actually do. For instance, investors say that want diversification, but very few, in practice, are willing to implement a truly diversified portfolio. Why? The psychological trauma that people experience when they diversify (and watch parts of their portfolio draw down) is simply too painful. This leads into a discussion about one of Eric and Meb’s favorite ways to diversify a portfolio: managed futures. The numbers suggest managed futures are a fantastic addition to a portfolio. Eric ran an experiment with his clients involving portfolio construction. He presented clients the returns and volatility numbers of a handful of asset classes – without revealing what those asset classes were. 100% of the time, when presented blind, people chose managed futures as their core holding. Eric and Meb then move on to the returns of great fund managers like Buffett and Soros. Eric studied these managers with the thesis that they must have done something other investors are uncomfortable doing (which is the source of their long-term alpha). He concludes that this differentiator is actually “underperforming their benchmark.” Eric says Berkshire Hathaway is a “glaring” example. An investor in Berkshire would have underperformed the S&P more than half the time (over various time-periods), but would have made tremendously more money than investing in the S&P. This leads Eric and Meb back to the psychological side of investing, specifically, the pain of relative performance. Meb recalls the Buffett or Munger idea that it’s not greed and fear that drives the investment world; it’s envy. Meb then turns the focus toward playing defense, which leads Eric to tell us how few people realize the impact on their returns of avoiding drawdowns. Avoiding the big losers has more impact on your compounded returns than catching the big winners. In other words, defense is what wins championships. There’s far more: how 80% of all stocks effectively return 0%, while just 20% of stocks account for all market gains… a pointed warning from Meb to listeners about the fees associated with managed future “fund of funds”… and of course, plenty more on Eric’s trend following approach. All of this and more in Episode #14.
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