I love working in markets — it keeps my mind active and young. I believe the cold reality of market moves also helps to keep any tendency towards unjustifiable self-confidence in check. Lately, my sense of humility has been on the rise for good reason.
We often use opposites to describe the complex reality around us: bull vs. bear in financial markets, good vs. bad for ethics, yin vs. yang for Taoists, even Darth Vader vs. Luke Skywalker for Star Wars fans. We tend to simplify complex ideas with opposing characterisations, since it can be easier to view the world in black and white, rather than in its truer shades of grey. As day turns into night, politics veer from left to right and market cycles shift from peak to trough, each phase embeds the seeds of its own destruction to make way for the next phase.
The market is like a giant computing machine weighing everyone's opinions and showing its hand in price changes without revealing its reasons. The observer is often unable to objectively judge the incoming data without any preconceived biases and thus, the chosen narratives reflect more about the observer's beliefs than a rigorous assessment of market signals. In other words, the observer often refuses to see the real picture because of their inherent biases. Looking is not seeing, listening is not hearing.
How can we minimise our biases?
Much academic literature attempts to explain the detrimental effect of biases on human judgement and what can be done to minimise them. That's why good investors attempt to eliminate as many biases as possible by following consistent and regimented processes. All of our teams at Nikko AM try to remove individual biases by encouraging the best of ‘free thinking’ and peer challenge in a flat organisational setting. Team-based investment processes ensure that an individual trained in one way or specialised in one sector does not end up introducing their inherent stock or sectoral biases into the portfolio. That's why I believe a strong team culture is as important as collective excellence of individuals to ensure long-term performance.
At times, a team based in one location, rooted in one region, or specialised in one asset class can carry its own team-embedded biases. For example, many investors have a home market bias due to familiarity and other factors. One way to self-correct inherent team biases is to debate with other teams, listen to their views with an open mind and expose one's own conviction views to others' dissection. That's the reason why we foster firm-wide forums and informal cross-team and cross-border discussions to encourage frequent exchange of ideas to hopefully make us all better investors.
Taken one step forward, aren't we (finance types) already inherently biased, because of our profession or common perspective in seeing the world through the lens of investment returns? This bias was exposed by the recent Brexit referendum as the law of democratic representation (one person, one vote) revealed the flaw of odds-based decision making and market-implied predictions, which count each dollar bet as one vote. The referendum result should serve as a caution—politics are trumping economics currently. Capitalism in the form of central banking experiments has skewed wealth so much that we may be nearing a tipping point. This type of bias inherent in an entire profession is extremely hard to correct, except by remaining humble, open-minded and very well-read across many disciplines. In addition, teams should embrace the diversity of their members and the variety of perspectives that their different cultural, educational and philosophical backgrounds can provide.
We all display a bias for holding onto those things we are familiar with and rejecting the unfamiliar. However, a number of conventional wisdoms are being increasingly challenged and disrupted by new technologies and business models. We are in the midst of a period of momentous change, with recent rapid advances in blockchain technology, robotics, artificial intelligence, the internet of things (IoT), self-driving cars and 3D printing. It is a brave new world. A century ago, the raging debate was about the safety and convenience of cars versus horse buggies. Henry Ford, the disruptor of the last century, famously said, “If I had asked people [conventional wisdom] what they wanted, they would have said faster horses.”1 Clearly, conventional wisdom, i.e. bias in favour of linear thinking, would have stymied many innovations which have taken a non-linear path of growth.
The time dimension in investing
While time is on the side of innovators, because the only certainty in the long run is uncertainty, running out of time can be deadly for a well-conceived investment idea. This is known as the gambler's ruin problem, because no one has infinite wealth and a fair coin toss can turn up heads more often than the number of chips on the table. Thus, staying power is often the final determinant of how good an idea is.
What makes a great investor is not being right all the time. It comes down to patience, stamina and discipline, qualities of character which are in short supply among some smart investors. Differences of performance often comes down to proper sizing of positions, limiting downsides but letting your winning ideas run, having the stomach to stand firm against consensus. Having great ideas is just a beginning. Experience and execution are the requisite ingredients to turn ideas into real performance.
- Patrick Vlaskovits, Henry Ford, Innovation, and That “Faster Horse” Quote, Harvard Business Review (August 29, 2011). In this article, the author found that Ford never said this particular quote, but those words well reflect the man's genius of innovation.