《Mastering the Market Cycle: Getting the Odds on Your Side》

THE CYCLE IN SUCCESS

The Role of Human Nature

Another way I put it is that “success isn’t good for most people.” In short, success can change people, and usually not for the better. Success makes people think they’re smart. That’s fine as far as it goes, but there can also be negative ramifications. Success also tends to make people richer, and that can lead to a reduction in their level of motivation.

In investing there’s a complex relationship between humility and confidence. Since the greatest bargains are usually found among things that are undiscovered or disrespected, to be successful an investor has to have enough confidence in his judgment to adopt what David Swensen, the hugely successful head of Yale’s high-performing endowment, describes as “uncomfortably idiosyncratic portfolios, which frequently appear downright imprudent in the eyes of conventional wisdom” (Pioneering Portfolio Management, 2000). By definition, pronounced bargain prices are most likely to be found among things that conventional wisdom dismisses, that make most investors uncomfortable, and whose merits are hard to comprehend. Investing in them requires considerable inner strength.

[[重要]] 切身体会与共鸣

When one of those positions initially fails to rise as the investor expects—or perhaps goes in the opposite direction—the investor has to have enough confidence to hold on to his position or even add to it. He can’t take a price decline as a sure “sell” signal; in other words, it can’t be his default position that the market knows more than he does.

But, on the other hand, the investor also has to know his limitations and not assume he’s infallible. He has to understand that no one knows for sure what the macro future holds. While he’s likely to have opinions regarding the future course of economies, markets and interest rates, he should acknowledge that they’re not necessarily correct. And, counter to the above, he mustn’t always assume that he’s right and the market’s wrong—and thus hold or add without limitation and without rechecking his facts and his reasoning. That’s hubris.

As successes accrue, it’s common for people to conclude that they’re smart. And after making a lot of money in a strongly rising market, they decide they’ve got investing mastered. Their faith increases in their own opinions and instinct. Their investing comes to reflect less self-doubt, meaning they think less about the possibility of being wrong and worry less about the risk of loss. This can cause them to no longer insist on the full margin of safety that gave rise to their earlier successes. This is the reason for one of the oldest and most important investment adages: “don’t confuse brains with a bull market.”

The plain truth is, there’s little of value to be learned from success. People who are successful run the risk of overlooking the fact that they were lucky, or that they had help from others. In investing, success teaches people that making money is easy, and that they don’t have to worry about risk—two particularly dangerous lessons.

They may conclude that the small opportunity that gave them their big winner is infinitely scalable, which most are not. And many people—including investors who became famous for having had a single success—conclude that they can branch out into any number of other fields: that the intelligence that produced that first epic success must be broadly applicable.

Factors like these make investment success hard to replicate, meaning it can prove cyclical rather than serial. In fact, rather than imply that another is coming, one success may in and of itself make a second one less probable. I’ll quote Henry Kaufman, formerly Salomon Brothers’ chief economist: “There are two kinds of people who lose a lot of money: those who know nothing and those who know everything” (“Archimedes on Wall Street,” Forbes, October 19, 1998).

It’s not for nothing that there are famous jinxes, such as showing up on the cover of Sports Illustrated or Forbes magazine. A cover appearance can be the result of a singular accomplishment that may have resulted from a lucky break, a unique, non-replicable opportunity, or the bearing of imprudent risk. Or the good outcomes that land people on a magazine cover—including the successful investors lauded by Forbes—may cause them to become more confident and cocksure, and less disciplined and hardworking . . . not much of a formula for success.

CYCLE POSITIONING

There are three ingredients for success—aggressiveness, timing and skill—and if you have enough aggressiveness at the right time, you don’t need that much skill.

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I’d like to return to that simple sentence and apply a little more thought regarding the formula for investment success. I conclude that it should be considered in terms of six main components, or rather three pairings:

• Cycle positioning—the process of deciding on the risk posture of your portfolio in response to your judgments regarding the principal cycles
• Asset selection—the process of deciding which markets, market niches and specific securities or assets to overweight and underweight

Positioning and selection are the two main tools in portfolio management. It may be an over-simplification, but I think everything investors do falls under one or the other of these headings.

• Aggressiveness—the assumption of increased risk: risking more of your capital; holding lower-quality assets; making investments that are more reliant on favorable macro outcomes; and/or employing financial leverage or high-beta (market-sensitive) assets and strategies
• Defensiveness—the reduction of risk: investing less capital and holding cash instead; emphasizing safer assets; buying things than can do relatively well even in the absence of prosperity; and/or shunning leverage and beta

The choice between aggressiveness and defensiveness is the principal dimension in which investors position portfolios in response to where they think they stand in the cycles and what that implies for future market developments.

• Skill—the ability to make these decisions correctly on balance (although certainly not in every case) through a repeatable intellectual process and on the basis of reasonable assumptions regarding the future. Nowadays this has come to be known by its academic name: “alpha”
• Luck—what happens on the many occasions when skill and reasonable assumptions prove to be of no avail—that is, when randomness has more effect on events than do rational processes, whether resulting in “lucky breaks” or “tough luck”

Skill and luck are the prime elements that determine the success of portfolio management decisions. Without skill on an investor’s part, decisions shouldn’t be expected to produce success. In fact, there’s something called negative skill, and for people who are saddled with it, flipping a coin or abstaining from decisions would lead to better results. And luck is the wildcard; it can make good decisions fail and bad ones succeed, but mostly in the short run. In the long run, it’s reasonable to expect skill to win out.