Thinking in the time of CORONA: Be careful what you wish for
‘Be careful what you wish for, lest it come true!’
The origin of this saying is Aesop’s Fables, the world’s best known collection of morality tales (circa 260 BC).
Most of us can relate to the charming dreams of many young girls, and some young boys, who dreamt of becoming Miss Universe. While the noble motives to help feed the poor children and work towards world peace would have been admirable and oulik, it is very unlikely that reality would have accurately reflected the dream. (I think we’ve all seen enough of those pageant parents to shatter any lingering wistfulness.) And those wishes for longer weekends, time to learn the guitar, less time in traffic…en kyk hoe lyk ons nou!!
It would be reasonable to assume that the dream of any business development/marketing person in the asset management space would be to hold the Number One position across all periods in their category. Hence the title of this article…and while we’d rather be where we are than anywhere else, one is mindful of the devastation and despair that surrounds us currently. While we don’t have an office war-cry bellowing that we’re No. 1, we do have refrains relating to transparency, simplicity and consistency; our positioning will certainly change, the latter will not. We are also aware of the impact of the ‘easy come, easy go’ mentality of some investors – the constant search for the Holy Grail that motivates them to follow the red dot sans much understanding of the underlying philosophy.
In my early days with Gryphon, we ran a social media campaign which was a series of photographs of the team with quotes from each of them. My quotation at that time was, ‘I believe that Gryphon is about to become the overnight success it takes 20 years to earn.’ So, the fact that Gryphon has firmly established itself as a credible diversification option does not surprise me in the least…and it does give us a firm base from which to engage.
Current events, though, have created the opportunity to reflect on how we got to be here as well as some of the wisdom we’ve gleaned as a result. We’ve written a number of articles explaining and sharing the investment perspectives, but I thought I’d shift the perspective a little…share some thoughts.
Some of those thoughts:
1. Because something is simple that does not mean it’s easy: if something is simple, it’s clear and logical…it doesn’t mean it’s easy to do or to implement. If you take riding a bicycle, the concept is simple; get on the bicycle, pedal, don’t fall off. For a beginner, easier said than done. The same with learning the guitar: get the guitar, learn the chords, get leather pants and take it on the road. Having a set of guide lines to follow sounds really simple and it’s reasonable to assume that that means it’s easy to be done. But having the courage, fortitude and single-mindedness to remain focussed and unaffected by external noise, expectation and resist the temptation of bright shiny things, is a lot more challenging than it appears – whether managing investments or learning to ride a bicycle/play guitar. And it’s only if you are able to stick to it that you can eventually stand back and reflect on the degree of success…and then of course, what is the benchmark of success…but we’ll save that one for another day…
We have already written an investment-related article, but I’ve included this concept here to raise awareness of the reluctance and resistance by investors to consider the integrity of what is simple, and then to allow the implementation to be done by the experts. (The article can be found here: Simple, but not easy.)
2. Skill versus luck – it is reasonable to allow that success is a combination of skill and luck. In rules-based investing we rely more heavily on the skill side and are grateful for the generosity of luck. I defer to the wisdom of someone far more erudite than I for additional insights. Michael Mauboussin said, “There's a quick and easy way to test whether an activity involves skill, whether you can lose on purpose.” He goes on to say:
Skill is the ability to fire knowledge readily in performance and execution. We know how to do something, and when the moment comes, we can do it.
Luck has three specific features — it works for an individual and/or organization, it can be good or bad, and it's reasonable to expect something else could have happened.
While most of us are comfortable acknowledging that luck plays a role in what we do, we have difficulty assessing its role after the fact. Once something has occurred and we can put together a story to explain it, it starts to seem like the outcome was predestined.
Statistics don't appeal to our need to understand cause and effect, which is why they are so frequently ignored or misinterpreted.
Stories, on the other hand, are a rich means to communicate precisely because they emphasize cause and effect.”
These insights so clearly articulate the experience of being a rules-based investor as opposed to an active investor. I have worked in both arenas and appreciate and respect the significance of each. I have also watched investors listen in fascination to an active manager as he tells the exciting anecdotes of companies they’ve invested in; why they bought them, their prospects, the excitement and drama of expectation. As humans we love stories, and especially stories of the underdog succeeding (just think SA rugby), of Lotto wins, of The Boys in the Boat, of delicious, startling outcomes and there is a fascinating magic in being able to weave such tales. I mean no disrespect to active managers; they have great stories to tell and I’ve sat as spellbound as anyone. But then, as the manager of an index tracker, our story goes like this, ‘the index went up and we followed it; and then it went down, and we followed it.’ The End. It’s not shiny, it’s not intriguing, it just works, and it has outperformed most active managers most of the time…even in this market decline. Contrary to popular understanding, there is no luck involved in tracking an index; this is pure unadulterated skill. (More can be found here: A rising tide lifts all boats)
3. About Having Enough. What is enough? Fear and greed are the twins we are all familiar with but they are not the problem in and of themselves; the problem is how they inspire us to act. We had a conversation in the office recently about what is enough, and an esteemed colleague smiled wryly and said, ‘has an investor ever been happy with their returns?’ (This was of course in the good old days when we were in the office and you could see wry smiles.) Having given this some thought, cynical as it sounds, there is profound truth in that. Clients invested in our multi asset funds were happy to have a positive return from their funds when the markets were down 36%...then, that was enough...but it was fleeting. The market is now bouncing around like a shot cat and investors are seeing crazy daily returns in equities and pressure is being brought to bear because they are convinced that they should be getting a piece of that also…
And it’s not as if the multi asset funds have been MIA when equities have run – for the period of February 2017 to end August 2018 the funds were invested in equites and were positioned top decile – so being in the funds is not as unexciting as kissing your sister.
Buddhist lore describes the ‘hungry ghosts’ that have huge, empty stomachs and pinhole mouths, and their necks are so thin they cannot swallow, so they remain hungry…they can never be satisfied. This does seem to be reflective of our society in general – we are so desperately committed to having more, wanting more, needing more - whether it’s returns on investments or toilet paper.
4. How serious are you about preserving your capital? Being #1 for a time is all very well…but we know that from there, the only way is down. What if the competition wasn’t snapshots of relative rankings at a point in time, but instead your success was evaluated by the degree to which an investor’s capital had been protected? It’s very easy to pay lip service to a concept but often the huge hurdle we encounter is apathy. Investors really like the idea of the multi asset funds but moving out of the zone in which they’re comfortable, and have been for some time, is not very appealing.
Up until about a year ago, I had my preservation funds invested across a range of 4 or 5 well-known, reputable unit trusts. I work with a financial adviser whom I trust, admire and respect…and still do…but based on my utter conviction of Gryphon’s process, I made the decision to sell all but one of those funds and move 80% of my portfolio into the Gryphon Prudential Fund. He raised the egg/basket risk, which is appropriate given his role and responsibility. Diversification is about the only free lunch and generally I would endorse any investment plan that incorporated a range of preferred funds. However, my commitment was to honour my conviction that the Gryphon funds would deliver as promised – the fact that I had utmost trust in the team that I work with was also a significant factor. I moved the funds into the Gryphon Prudential Fund and, obviously, as it stands right now, my trust has been more than rewarded. I still can’t retire but that’s not because of the markets or the funds; that’s because I have an addiction to wandering, an incurable wanderlust.
5. A rigorous discussion with what turned out to be a new investor gave cause to reflect on the conundrum facing investors at the moment – do you get out now, or do you hope that there will be some recovery and then you’ll be better positioned to be able to decide what to do; do you stay or do you go? As a part of this reflection, I appreciated, again, the rules-based method, the painting by numbers approach that provides signals and a structure to assist in these decisions. Never more so than after reading this delightful description of decision-making by the inimitable Alan Watts,
“You do not know where your decisions come from. They pop up like hiccups. And people have a great deal of anxiety about making decisions. Did I think this over long enough? Did I take enough data into consideration? And if you think it through, you find you never could take enough data into consideration. The data for a decision for any given situation is infinite. So what you do is, you go through the motions of thinking out what you will do about this…and then you wing it.”
In closing, please spare a thought for my poor beloved sons - I’m one of those who finally got to do the ‘teach-myself-the-guitar-thing’ during lockdown and I can now play 5 songs badly (a few more very badly)and at some point soon they will be obliged to listen to me…but at least they get good investment advice…