Wes sent through this outstanding more-than-30-year-old speech, Trying Too Hard (.pdf), which foreshadows many of the ideas we discuss in Quantitative Value, so much so that I feel that I should point out that neither Wes nor I had read it before we wrote the book. The speaker, Dean Williams, named the speech for this story:
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?” A the time I thought, “Who ever heard of trying too hard?” Well, over the years I’ve changed my mind about that. Tonight I’m going to ask you to entertain some ideas shoe theme is this: We probably are trying too hard at what we do. More than that, no matter how hard we try, we may not be as important to the results as we’d like to think we are.
The speech covers the following themes, among others:
- Prediction
…[M]ost of us spend a lot of out time doing something that human beings just don’t do very well. Predicting things.
- Forecasting, information, and accuracy
Confidence in a forecast rises with the amount of information that goes into it. But the accuracy of the forecast stays the same.
- Expertise and forecasting
And when it comes to forecasting – as opposed to doing something – a lot of expertise is no better than a little expertise. And may be even worse.
- The importance of mean reversion
If there is a reliable and helpful principle at works in our markets, my choice would be the ones the statisticians call “regression to the mean”. The tendency toward average profitability is a fundamental, if not the fundamental principle of competitive markets.
…
It can be a powerful investment tool. It can, almost by itself, select cheap portfolios and avoid expensive ones.
- Simplicity
Simple approaches. Albert Einstein said that “… most of the fundamental ideas of science are essentially simple and may, as a rule, be expressed in a language comprehensible to everyone“.
- Consistency
Look at the best performing funds for the past ten years or more. Templeton, Twentieth Century Growth, Oppenheimer Special, and others. What did they have in common?
…
It was that whatever their investment plans were, they had the discipline and good sense to carry them out consistently.
- And finally, value
Spend your time measuring value instead of generating information. Don’t forecast. Buy what’s cheap today.
Read Trying Too Hard (.pdf). You won’t regret it.
h/t/ The Turnkey Analyst
[…] human judgment to pick stocks. Batterymarch’s Dean Williams delivered the incredible “Trying Too Hard” speech from 1981, which is required reading if you’re interested in behavioral […]
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[…] I often describe my investment philosophy as a synthesis of ideas from Ben Graham, Walter Schloss, Warren Buffett, and Joel Greenblatt. At the core of my strategy is Graham and Schloss’ quantitative methods for valuing stocks. It’s far more difficult to make mistakes when you simply make obvious, simple decisions based on valuation. In each investment, I want to ensure I’m not taking on valuation risk. Many investors (including most value investors) overly complicate things and this can often lead to counterproductive results. That’s why many smart guys get mediocre results. They try too hard. […]
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Interesting exhaustive research published recently that asserts there’s no such thing as mean reversion – that it’s an illusion. So even the simplest wisdom may be wrong.
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Must be true. Link?
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I’m not panskeptic, but this might be the research against mean reversion from the Credit Suisse Global Investment Returns Yearbook 2013:
http://www.bogleheads.org/forum/viewtopic.php?f=10&t=110734
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I understand “mean reversion” to refer to several observations in the finance markets, including the tendency of undervalued / over valued stocks to regress over time to the average valuation (see Contrarian Investment by LSV), and the tendency of high / low profit margins to regress to the average profit margin (see ROIC and Mean Reversion by Mauboussin). I’ve never understood it to mean “large equity losses are eventually followed by large gains,” although I accept that, if that phenomenon was real, it would be described as “mean reversion”. I believe that Mr. Williams is using it in the way I understand it, and not in the latter manner.
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The paper regarding the lack of mean reversion is the credit Suisse 2012 global yearbook. Sorry I can’t link it.
I use mean reversion in my investing and I think it is quite effective.
Regards
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My experience has taught me that mean reversion is a slippery phenomenon. It is not purely related to the stocks fundamental characteristics like ROIC, ROE, value to price etc, but to the market based perceptions about how bad (or good) those characteristics are. Psychology and perception more often drive price than the actually fundamentals. Thus, for value investors opportunity can be created by overreaction to a temporary stumble that is extrapolated out as a permantent reduction in earnings power or NAV. The trick becomes to distinguish between those unjustified overreactions where price is likely to revert back to trend, and situations where value is actually impaired. This is why many naive models of value work better over time than active managers. We active managers too often are wrong or biased in our judgements. Such active errors do not negate however the phenomenon of reversion to the mean. If it did then most models of value investing would be fallacious.
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Interesting research recently that maintains there’s no such thing as mean reversion. So even the simplest wisdom may be wrong.
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[…] found an old speech by Dean Williams of Batterymarch Financial Management packed with timeless […]
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[…] You Trying Too Hard? https://greenbackd.com/2013/03/07/do-you-think-you-might-be-trying-too-hard/ A fantastic read–if you only read this, you will do better as an […]
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[…] Are we investors trying too hard? (Greenbackd) […]
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This is a great paper. There is also another type paper called “On Thinking” by Arthur Zeikel for those that are interested. You can google it.
Thanks for the post.
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Great post… interesting stuff. I’ve never heard of Dean Williams before… I love the commentary around doing simple things. Simplicity is Elegance.
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I think it’s a work of art.
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