Trying Too Hard: Keynote Speech in 1981

[dcollon]

Chris Mayer who writes a couple of great pieces for Agora Financial highlighted the attached speech in a recent commentary.

 

I think you will enjoy it. 

Williams-Trying_too_Hard1.pdf

[NormR]

Thanks!

[claphands22]

dcollon, you have a habit of posting great material. Thanks for the transcript.

[dcollon]

That's nice of you to say claphands22. 

 

Enjoy your afternoon.

[vinod1]

dcollon, you have a habit of posting great material. Thanks for the transcript.

+1

 

dcollon,

 

Thanks for uploading this fantastic transcript. This is definitely one that needs to be re-read every year.

 

Vinod

[WhoIsWarren]

Yeah, great read.  The more things change, the more they stay the same! So much of what we talk about is the same stuff he was writing about 30 years ago (and perhaps a number of decades before him).

 

I love the story about Dr. Fox.

[rranjan]

Fantastic read. Thanks for posting it.

[Guest FFHfan]

thank you dcollon.  :)

[Kiltacular]

+1

 

dcollon,

 

Thanks for uploading this fantastic transcript. This is definitely one that needs to be re-read every year.

 

Vinod

 

+2

 

Great stuff

 

 

 

 

[dcollon]

I'm really glad you guys like it as much as I did.  Confirmation bias is nice.  ;)

 

 

[LC]

Yeah I've got to say I really liked it too. Sorry to add to the confirmation bias :)

 

Here's some questions I pose to the board:

Where is the line between "trying too hard" and keeping it simple?

Do I even need to do analysis? Deep dives of financial statements?

If an investment is not simple, is it a bad investment?

What does "simple" really mean? The COBAF thread on BAC is 200+ pages long, and yet the thesis is seven words long ("earnings power hidden by legacy costs").

 

[rranjan]

Yeah I've got to say I really liked it too. Sorry to add to the confirmation bias :)

 

Here's some questions I pose to the board:

If an investment is not simple, is it a bad investment? - Complex doesn't necessarily mean bad but simple has higher chances of you not missing something critical.

What does "simple" really mean? The COBAF thread on BAC is 200+ pages long, and yet the thesis is seven words long ("earnings power hidden by legacy costs"). -- Hidden earning power is very simple conclusion but reaching this conclusion is not easy without doing some due diligence. Simple doesn't necessarily mean easy. Even after 200+ pages not everyone will agree to final conclusion.

 

Few thoughts above in bold.

[Guest hellsten]

Thank you! Great speech.

 

The importance of nonsense can hardly be overstated.

 

It is not difficult to attain enlightenment, but it is difficult to keep a beginner's mind. In the beginner's mind there are many possibilities, but in the expert's mind there are few.

 

More on "Dr. Fox":

http://repository.upenn.edu/cgi/viewcontent.cgi?article=1126&context=marketing_papers

[WhoIsWarren]

Link to audio book of "The Dancing Lu Wi Masters" by Gary Zukav, mentioned in the article.  I'm a chunk of the way through and it's enjoyable, very interesting.

 

http://www.youtube.com/watch?v=MroBJsi9y6g

[txitxo]

Chris Mayer who writes a couple of great pieces for Agora Financial highlighted the attached speech in a recent commentary.

 

I think you will enjoy it.

 

  I loved this! I fully agree with the practical advice, as Graham said: "buy a list of diversified, statistically cheap stocks". You will not blow up, and you will end up making quite a bit of money.

 

  But the physics analogy is not right. Of course at that time very few people had heard about Chaos Theory, which I think is the best physical explanation for what goes on in the stock market. In QM the uncertainty is intrinsic, in the sense that you cannot measure the state of things with high precision due to physical limitations, that's what Heisenberg's principle tells you. But on the other hand, if you know the structure of a system well, you can calculate probabilities with astonishing accuracy, up to many decimal places and perfectly predict its statistical behavior.

 

  Chaos theory tells you that for certain systems, no matter how well you measure all the parameters involved, you will not be able to make precise predictions. See this video:

(but turn off the sound because the music is atrocious). Three points which are very close at the beginning quickly diverge, even in a system as simple as the Lorentz's attractor, which is governed by a set of deterministic equations, with no random noise introduced anywhere. You can see the same effect with a real water wheel: 

 

So you can thoroughly study a company, visit all the factories, count all the nuts and bolts in the inventory, learn by heart the CVs of all the managers, etc. and still you will not be able to forecast earnings or sales with reliability. Because of that, you are much safer if you assume your ignorance, realize that you will not be able to predict performance accurately, no matter how smart you are or how hard you try, and deal with the system by empirically studying its pattern of long term behaviour.

 

Of course, all your cognitive biases will fight this concept...because you know that company A is going up, and you know that company B is going down, etc...

 

 

[ragu]

I think you will enjoy it.

 

dcollon,

 

You were right. Many thanks for posting this.

 

[...] you can be a successful investor without being a perpetual forecaster.

(pg. 5)

 

Indeed.

 

Best,

Ragu

[jay21]

Yeah I've got to say I really liked it too. Sorry to add to the confirmation bias :)

 

Here's some questions I pose to the board:

Where is the line between "trying too hard" and keeping it simple?

Do I even need to do analysis? Deep dives of financial statements?

If an investment is not simple, is it a bad investment?

What does "simple" really mean? The COBAF thread on BAC is 200+ pages long, and yet the thesis is seven words long ("earnings power hidden by legacy costs").

 

I didn't like this as much as others because I don't think the lesson should be do not try too hard.  The lesson I got was don't try to predict what is going to happen.  Don't listen to "experts," forecasters, etc.  That has nothing to do with the due diligence you need to invest.  Look at the most successful investors:  Warren, Klarman, Einhorn, Ackman, Bruce, etc.  All of these investors dedicate 100s of hours to investment ideas.  Klarman had one analyst whose 9 to 5 job was to unravel Enron for like 1 to 3 years.  Warren reads annual reports of companies he isn't even interested in buying under any circumstance.  The most successful people in almost every field are those who commit their lives to their craft.

 

With that being said, investing isn't a "hard skill" that needs practice.  I think you can do fine buying a diversified group of cheap securities.  But if I am a professional and want to be the best the investor I could be, I would want to commit most of time to investing.  The message should be focus on the right questions (e.g. "What is the competitive landscape?') vs. the wrong ones ("What will earnings be next quarter?  What are interest rates going to be next year?"). 

[Kraven]

Yeah I've got to say I really liked it too. Sorry to add to the confirmation bias :)

 

Here's some questions I pose to the board:

Where is the line between "trying too hard" and keeping it simple?

Do I even need to do analysis? Deep dives of financial statements?

If an investment is not simple, is it a bad investment?

What does "simple" really mean? The COBAF thread on BAC is 200+ pages long, and yet the thesis is seven words long ("earnings power hidden by legacy costs").

 

I didn't like this as much as others because I don't think the lesson should be do not try too hard.  The lesson I got was don't try to predict what is going to happen.  Don't listen to "experts," forecasters, etc.  That has nothing to do with the due diligence you need to invest.  Look at the most successful investors:  Warren, Klarman, Einhorn, Ackman, Bruce, etc.  All of these investors dedicate 100s of hours to investment ideas.  Klarman had one analyst whose 9 to 5 job was to unravel Enron for like 1 to 3 years.  Warren reads annual reports of companies he isn't even interested in buying under any circumstance.  The most successful people in almost every field are those who commit their lives to their craft.

 

With that being said, investing isn't a "hard skill" that needs practice.  I think you can do fine buying a diversified group of cheap securities.  But if I am a professional and want to be the best the investor I could be, I would want to commit most of time to investing.  The message should be focus on the right questions (e.g. "What is the competitive landscape?') vs. the wrong ones ("What will earnings be next quarter?  What are interest rates going to be next year?").

 

I didn't take from this that by not trying too hard he means to go drink umbrella drinks on the beach.  I think his point is that people try too hard doing the wrong things.  They come up with a 50 page treatise describing an investment idea when the thesis can be described best in a sentence.  They get agitated trying to figure out what the cost of postage will be in 2015 so they can plug it into their model.  What did Peter Lynch say?  Something to the effect that an investment idea that can't be written up quickly in crayon aren't worth doing.  I think that is the point, not to spend less time in the aggregate.

[Otsog]

If an investment is not simple, is it a bad investment?

 

I think the more complex the investment, the smarter you have to be.  In my case if it's not simple it likely is a bad investment. In the case of Michael Burry he took a simple thesis (housing collapse) and used his first rate mind to delve into the complexity of ABS prospectuses and convincing the IBs to create CDS's just for him. 

 

I am tentative to say this on a value board but I think there are ways that algorithmic technical trading can work.  It's just that the complexity of it is so immense that I wouldn't dream of attempting it without something like an applied mathematics PhD from MIT. 

 

[CassiusKing1]

Finally catching up on some of my reading.  Thanks for posting this, absolutely wonderful read.  The second to last paragraph is one I'll post in my office and read on a daily basis:

 

"For all of his reputation as the father of security analysis - which he was - Benjamin Graham was skeptical of anyone's ability to generate information unknown to the market or to forecast future earnings  His view of portfolio management wasn't information and it wasn't forecasts.  It was buying a diversified list of statistically cheap stocks."

 

-CK

[stahleyp]

very good read. thanks for posting dc.

[dcollon]

I thought this video from Dan Ariely's class was entertaining, especially as it relates to the story Williams tells about Dr. Fox in the "Trying Too Hard" speech.

 

 

[Guest hellsten]

I thought this video from Dan Ariely's class was entertaining, especially as it relates to the story Williams tells about Dr. Fox in the "Trying Too Hard" speech.

 

 

Thanks ;D

 

Same thing on Wikipedia:

http://en.wikipedia.org/wiki/Pluralistic_ignorance

 

Interesting example:

http://en.wikipedia.org/wiki/Groupthink#Swissair.27s_collapse