“Successful investing is anticipating the anticipations of others.”
– John Maynard Keynes
When people ask me what my edge is, I tell them I have a very good sense of what the crowd is thinking and I think I’ve gotten pretty good at what they’ll do about it next. I pay close attention to when there’s an emotional or tonal shift to the rhetoric of the Pundit Class because I know that the masses gradually adopt these oft-repeated tropes and heuristics for their own and act accordingly.
Keynes figured out that his job as the King’s College endowment portfolio manager was not to guess at the future – but to guess at what other market participants would be guessing and to beat them to those assumptions. Before he realized that this was the way to invest, his track record was terrible – lots of trading, very little to show for it, the Crash of ’29 nearly wiped him out of his own small fortune. But after this realization hit him, his confidence grew and his cockiness faded. His average holding times lengthened, his turnover decreased and his returns began to trounce the market.
Keynes was now a master at judging the judges of the beauty pageant, and leaving the judges themselves to fret over their petty calculations of pulchritude.
This is what I do.
I do not say that this is easy or that I can do it effectively all the time, but I’d much rather work on this skill than any other. I’d prefer to develop a consistent ability to survey the surveyors than try to be the best forecaster of the earnings of one kind of company. The reality is that fundamental research to determine cash flows and earnings per share is a software function with minor tweaks colored by conversations with management, customers and suppliers.
JP Morgan’s got an army of guys doing this for a living with very high stakes and each year they put out their Best Ideas list and their Stocks to Avoid list. First Solar (FSLR) was on their Stocks to Avoid list and it has outperformed 71 of their 72 best ideas. I am certain the analyst’s calculations were correct – but their conclusions could not have possibly been correct because they cannot forecast sentiment! Look at the consensus estimates for the Russell 1000 stocks that have more than ten sell-side analysts covering them – notable deviations from firm to firm are rare. The deviations are usually in the multiple these analysts think people will be willing to pay. This is guesswork about future sentiment, not math, and these Ivory Tower guessers are often disconnected from the vibe on the street.
I find that technical analysis, while very helpful to my process, is equally crowded with brilliant practitioners – a million traders and analysts that will likely uncover the patterns they live for significantly earlier than I will.
I pay attention to both technicals and fundamentals but my daily process involves much more than that.
Because I have learned that I am uniquely positioned at a very particular crossroads and every day I try to use it to my advantage.
When I look to the road headed east, I see my friends the economics bloggers and market columnists and other assorted professional commentators on the stock market. They are the makers of the memes, the repeaters of the rhetoric that color the way we think about trends and occurrences. They are the ones that turn news into NEWS and I get to watch that process in flagrante delicto. They read and regard the chief strategists and the pundits so I don’t have to. They synthesize the material and turn it into digestible content for the proletariat. I am highly attuned to this process, none of the inner-workings of it escape me. I try to keep a straight face when I see it being taken at face value by the consumer.
The western road leading the other way from the crossroads I inhabit is heavily traversed by my colleagues in the wealth management business and my friends from the trading world. They are blogging and tweeting and buying me a drink and sending me their newsletters and emails and all manner of feedback. I do my best to keep up with it and to quantify the sum total of the things they are excited and fearful about. It’s not quite a tapestry, more of a patchwork quilt. But I can shut my eyes, run my hands over the seams and feel out the grain of the fabric, make out the patterns even in the dark.
To the south, my clients and the prospective clients we talk to from the ranks of the high networth and ultra-high networth investor class. In many ways, these are the wisest people I talk with – they have correctly surmised that there is too much going on and they cannot seriously keep up with it while still running their own careers and lives and finding time for some leisure. They’ve figured out that life is short and success is only worthwhile if you allot yourself time to make the most of it. I’m incredibly fortunate to have access to them for conversations both serious and lighthearted. I am blessed to have this firehose of sentiment, this pipeline of insights about business and life and the mood of their fellow affluent investors.
Heading due north, up the road, I am tramping on the dust of theories debunked and assumptions ground into the gravel. Our internal investing process and the data we employ to make decisions guides us toward success but it does not spare us from the harsh lessons we must learn and sometimes re-learn. Science advances one funeral at a time, we are told, and so too do we trudge over our own mistakes on this path. It is the only way forward – there is no shortcut around these small mistakes and errors, but they are not insurmountable. The trick is to not let them get that way. I read an article years ago about a pair of fund managers who keep a Wall of Shame in their office with the ticker symbols of investments gone wrong as a reminder to remain humble and not repeat old errors. I thought to myself that if only they had my emotional scars – they sure wouldn’t need the fuckin’ bulletin board.
I like my crossroads. I’ve gotten good at holding it down. I’m on a continuing mission to keep it populated with smart people and informed opinion. If I keep making quarter-turns with both eyes open, I can see what everyone’s doing.
My hope is that if I’m always working at this and maintaining my place at the center of this crossroad, my ability to anticipate the anticipations of others will only grow.