“Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”
There is a lot of truth to this John Maynard Keynes quote, at least when it comes to the world of investing. To succeed unconventionally in the market, you have to be on the opposite side of the trade. And by opposite side, I mean the side that most people don’t think can happen, let alone will happen. But opportunities like these, one where everyone is on the side of the boat that’s about to capsize, are few and far between.
The market usually* gets things right, so in order to succeed unconventionally, you need something that most investors lack, patience. Take Michael Burry as an example. If you’ve read The Big Short, you know how hard it was for him to capitalize on his short housing thesis. He had investors breathing down his neck for years. Joel Greenblatt, who basically discovered him, threatened to sue him. His name was getting dragged all over Wall Street.
Outside of the markets, however, it’s better to succeed unconventionally than to fail conventionally. It’s like the whole idea that it’s better to be lucky than good.
In sports when buzzer sounds, the only thing that matters is who won and who lost. It would be ridiculous for a goalie to say, “60% of the time (I made this number up) the penalty kick is right down the middle, which is why I just stood there. Process over outcome.” Okay that’s great, maybe you’ll get them next time, but you just lost. There are no points for having the right idea when the right idea loses.
Money managers on the other hand, can and should tell their investors that they’re sticking with the process. For one, the game never ends. They can always say they’re not wrong just early. This assumes they’re making some sort of market call, in which case the process is often suspect, but that’s neither here nor there.
Think about strategies that actually do have an underlying and repeatable framework. How could they do anything other than stick with it? If they’re intellectually honest, they told their investors what the base rate is. “35% of the time this strategy fails over rolling three-year periods. 20% of the time it fails over 5 years. We expect this to happen and we’re not about to radically alter what we do when these results are to be expected.” Imagine a value investors saying, “Alright alright, I give up. Value clearly doesn’t work anymore. We’re going to do the opposite. We’ll be buying the third of the market with the highest valuations based on a variety of metrics. This has generated the best outcome over the last ten years and who cares about process anyway really? We’re all about outcome.”
Were a value manager to upend their process and actually get favorable results, it would be better for their reputation to fail conventionally, having stuck with the process, than to succeed unconventionally by deviating from it. Actually, wait, would it? Outcome over process? Okay, maybe this isn’t as cut and dried as I thought. Damn you JMK.
Anyway, I first thought about this during the podcast when Ben and I were talking about why coaches don’t go for it more on 4th down.
*except when it doesn’t