In his book The General Theory of Employment, Interest and Money, John Maynard Keynes famously wrote that “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.” This quote appears frequently in investment literature, often when discussing why most fund managers fail to beat the market.
Fund managers have a strong incentive to avoid “unconventional” failure as it often results in their clients leaving and taking their investment with them (see my last post). It’s also worth considering the sentences that appear just before this quote:
Finally it is the long-term investor, he who most promotes the public interest, who will in practice come in for most criticism, wherever investment funds are managed by committees or boards or banks. For it is in the essence of his behaviour that he should be eccentric, unconventional and rash in the eyes of average opinion. If he is successful, that will only confirm the general belief in his rashness; and if in the short run he is unsuccessful, which is very likely, he will not receive much mercy. Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.
According to Lord Keynes, beating the market requires long-term thinking, something that’s difficult to do in a group setting or on behalf of clients because it often involves going against the crowd.
Understandably, most fund managers are afraid of appearing to be eccentric, unconventional and rash. Let’s face it; it’s makes raising assets much harder. However, the best investment opportunities often hide in places where few other investors are looking.
Frederik Vanhaverbeke recently published: Excess Returns: A Comparative Study of the Methods of the World’s Greatest Investors. The book is a study a group of extra-ordinary investors that have beaten the US stock market over periods longer than 10 years.
A summary of Vanhaverbeke’s research can be found in the AAII article: Investment Wisdom from Wall Street Legends. Vanhaverbeke found that each of these investors, although very different, shared certain features in common.
The surprising thing is that their recommendations on how to beat the market are both eerily similar and pretty different from the way the average investor manages his or her investments. They look in the same uncommon places for bargains. They emphasize the same subtle qualitative factors in their due diligence, factors that are ignored by most other investors. They have similar buy and sell practices that fly in the face of conventional wisdom. And their risk management and portfolio construction run counter to academic theories on these subjects. Moreover, unlike the efficient market hypothesis, which assumes that most investors are rational, they stress that staying rational is a huge challenge that requires discipline and effective coping with psychological biases.
In short, successful long term investors share one particular trait in common: they have no problem appearing “eccentric, unconventional and rash in the eyes of average opinion.”
They understand, as did Lord Keynes – a very successful investor in his own right – that you are far more likely to identify compelling opportunities if you look where nobody else is looking.