It’s something that the pastor don’t preach
It’s something that a teacher can’t teach
– Kanye West, ‘No Church in the Wild’
I met with a money manager earlier this year who walked my colleagues and I through his firm’s investing process, which was a trading scheme based on a combination of 19 different technical analysis metrics. The outside rep who came to see us was young and enthusiastic about his firm’s approach, even though he couldn’t answer basic questions about whether or not those 19 variables had actually been measured for efficacy in terms of returns and risk. In the absence of these details, he relied heavily on the mantra of “process.”
When we asked a hypothetical about a period of prolonged large drawdowns and what the portfolio managers’ response might be, we were told that “We’re process oriented, but if something big’s going on, we can totally step in and do what we have to do.”
On the surface, this statement is obviously hilarious. We showed him the door shortly afterwards, with a non-committal “we’ll be in touch.” Even more hilarious was the fact this gentleman’s firm manages over $5 billion – mostly for other professionals, but I digress…
The thing is, some of the greatest investors of all time have tossed out their playbooks and improvised at opportune times. Either they got lucky or they saw something obvious that no one else did, but either way, it was the key to their transcendence. It’s literally the thing that allowed them to rise above.
We don’t hear much about the majority of people who did this and failed. We do tend to deify the ones who pulled a miracle out of their asses. That’s the mythology of the markets at work.
And then every once in awhile, we come across an investor who is able to do this repeatedly – break the “rules” and trade on pure instinct right at the moment when it counts.
According to his son, Robert, Soros’s trading was always influenced by more than reflexivity. “My father will sit down and give you theories to explain why he does this or that”, he once said, “but I remember seeing it as a kid and thinking, ‘Jesus Christ, at least half of this is bullshit’.
“I mean, you know [that] the reason he changes his position on the market or whatever is because his back starts killing him. It has nothing to do with reason. He literally goes into a spasm and it’s this early warning sign.”
Soros has admitted to relying greatly on “animal instincts”, saying the onset of acute pain was often “a signal that there was something wrong in my portfolio”.
His decisions, then, “are really made using a combination of theory and instinct”.
The above comes from a piece at the Irish Times this week celebrating the 84th birthday of one of the world’s most successful and brilliant investors, George Soros. Soros is an exceptionally deep thinker and clearly has a winning investment process. He’s the only hedge fund manager to have earned $40 billion in profits for his investors and the biggest money-making fund since inception on the planet (having pulled ahead of Ray Dalio’s Bridgewater again after last year’s $5.5 billion bonanza).
This $40 billion in proft is even more impressive when you contemplate the fact that this is all money he’s taken out of the market – over the course of decades – from other skilled traders who’ve been on the other side of his moves. He’s an alpha predator on a global scale – there’s never been anyone quite like him, before or since.
And for Soros and his Quantum fund, process has only been a part of the story.
Having a process is fine, but when a process meets the Real World, as Soros’s process surely has over the last four decades, it’s not going to beat the market on its own. At the end of the day, instinct is what’s going to be the difference between mediocrity and outstanding returns. Luck will surely play a role too – but the longevity and consistency of this track record is proof of another element at work. Most of us – statistically – won’t possess an instinct like that or won’t be able to reliably use it.
That won’t stop most of us from trying.
Process is helpful, being lucky is great too, but unhinging one’s jaw at just the right moment and devouring an entire gazelle in mid-sprint – that’s the thing. Many people believe they can be like Soros, and some will point to their process as proof of their seriousness. Unfortunately, merely showing up each day and being diligent in the execution of a process won’t make them the next world-beating macro player.
Sometimes the deciding factor is what’s in your gut. Or the pains in your back.
Sharpe ratios don’t measure this, nor do pedigrees, years of experience, credentials after one’s name or the address at which one keeps an office.
Because it’s animal, and, as such, it’s also unpredictable.