A Lesson from 1969
Lessons from History
“The farther back you look the farther forward you will see.”
-Winston Churchill
“A bad system will beat a good person every time.”
- W. Edwards Deming
No one really wants a strategy that works great in short run but awful in the long-run, yet through history it’s easy to find even the highest-IQ folk unknowingly opt in to just that. Take the profiles of “star” money managers from the 1969 book The Money Managers, who at the time were viewed by the general public as investment wizards. The book was written at a time when growth stock investing was all the craze.
An excerpt from a 1969 New York Times review introduces the book this way:
In “The Money Managers” we are shown a portrait gallery of a new breed of men. Most of them are in their thirties and forties, and they manage perhaps $50-billion of other people’s money (mutual fund, bank, insurance company and pension-fund portfolios; investment counseling accounts; private investment partnerships…… (this) new breed of younger managers (variously referred to as the gunslingers, the swingers, and the go-go boys) were acting on the heretical concept that the best way to preserve capital is to double it -- in a hurry...
The 19 men profiled in this book have something significant in common. Their involvement in the stock market is total, and they are as competitive as Olympic athletes….For anyone interested in the stock market the book is highly recommended.
History would show that these managers were not geniuses but instead a sign of the times, which was both irrational and exuberant. Much like the 1999 tech bubble, the bulk of the investing public, as well as institutional money, came to the conclusion that no price was too high for the growth companies that could change the world. The profiled star money managers would lose as much as 70% over a short period, and most of them would ultimately close down their funds or firms.
So how could an investor in 1969 have avoided such wealth destruction? To start, they could have listened to one unknown hedge fund manager at the time, a young Warren Buffett, who perfectly pinpointed why it was so unlikely that these go-go boys would find lasting success.
Buffett in 1967 (from the wonderful book Supermoney):
"Philosophically, I am in the geriatric ward," he wrote. "We live in an investment world populated not by those who must be logically persuaded to believe, but by the hopeful, credulous and greedy, grasping for an excuse to believe.”
To better understand why Buffett felt the way he did, let's look at what these much-loved "professionals" said at the time:
From The Money Managers:
“‘I’m paid to make decisions, not to justify them,’ he insists.”
“We found that experience gets to be a disability, we had learned to be thoughtful but we found out that if you’re too thoughtful you don’t know what’s going on.”
“Meid’s propensity to believe is unsullied by more traditional forms of analysis...He relies almost entirely on ‘soul session’ conversations with his sources, and on his daily scanning of the closing prices to spot trends and movement.”
“I remember one company that I would have bought if it weren’t that the chief executive was an unbearable bore.”
“Carl Hathaway, who helps run some $9 billion at the Morgan bank, doesn’t like companies run by fat men. (Recently I asked about a company in his portfolio run by a gentleman of some girth and weight. Had he made an exception? Was this just a gag? ’No,’ Carl said, ’he’s just chubby.’)”
“I tend to be a player of trends, and I like to be where the action is. His single aim is to ’be in phase with the best performing stocks,’ whether they are oceanography stocks or utilities. If blue chips are moving, we’ll buy blue chips.”
“It’s not that we’re any smarter. It’s that we work at it, minute by minute, all day long.”
“I felt I was the smartest person there.”
“There is an almost unlimited number of emerging growth companies around.”
(My Note: 1969 to 1979 has gone down in history as one of the worst all-time periods for investing in growth companies.)
What these gentleman failed to realize is that well-defined beliefs doesn't mean beliefs are well-justified. You really need both.
While the statements sound ridiculous they did fit the temperament of the time. The more money these managers made, the more the public intently listened to the distorted reality they embraced.
The Lesson
People often accept any explanation as long as it fits what their eyes can see, in this case markets euphorically going in one direction. In the realm of investing self-fulfilling prophecies do not last forever. Be wary of adopting the collective wisdom of the moment.