In a conversation with the master jazz musician and Pulitzer Prize-winning composer Wynton Marsalis, he told me, “You need to have some restrictions in jazz. Anyone can improvise with no restrictions, but that’s not jazz. Jazz always has some restrictions. Otherwise it might sound like noise.” The ability to improvise, he said, comes from fundamental knowledge, and this knowledge “limits the choices you can make and will make. Knowledge is always important where there’s a choice.” - The Art of Choosing, Sheena Iyengar
Letters to Our Clients
In one of our meetings, Justin asked a question of me. He said, “Why is it that the only investment managers telling people to be careful are old timers like you? Jeremy Grantham of GMO, whose seven year forecast is negative in all asset classes other than emerging markets. Howard Marks, whose most recent memo “There They Go Again…Again” strongly suggests people be cautious in their investing today. John Hussman, who has been screaming at the top of his lungs about the “overvalued, overbought, overbullish” markets. Seth Klarman who, at least from what we hear, is sending money back to his investors due to an absence of good opportunities. And finally Warren Buffett, the most recognized value manager in the world, whose Berkshire Hathaway is holding billions, not because he wants to sit on the cash, but because like Klarman, he is struggling to find options available at a reasonable price to purchase.
Most of us believe that experience in an occupation, measured by time spent on the job, leads to higher productivity for the employer and greater income for the employee. I agree that this belief holds true for most occupations. However, I disagree when it comes to the business of providing investment advice. In this business, the best experience is gained when an advisor’s own wealth is at risk, and his or her decisions are measured by personal dollars gained or lost. While it’s always good to be right about your investments and make money, the most valuable knowledge is gained through the experience of being wrong.
Our lives often seem to be dominated by numbers. Social Security numbers, drivers’ license numbers, account numbers… an unlimited number of 0’s and 1’s residing in thousands of databases, many of which are designed to keep track of our every move. Most of these numbers used to identify us are not necessarily wanted. However, there are some numbers that we do appreciate. Most are earned through hard work. Youngsters may take pride in their grade point average or SAT scores. For adults, numbers tend to be used to measure our individual accomplishments and disappointments.
“When the facts change, I change my mind. What do you do madam?”
- Winston Churchill, John Maynard Keynes, Paul Samuelson?
The CFA Institute’s second quarter 2017 Financial Analysts Journal included a research article penned by Martijn Cremers, professor of finance at the University of Notre Dame, entitled “Active Share and the Three Pillars of Active Management: Skill, Conviction, and Opportunity.”
We are currently struggling with portfolio construction due to historically high stock prices and interest rates that provide little reward, and I thought it would be beneficial to share with you Cremers’ understanding of what it takes to be a successful money manager:
The vast majority of businesses manage their operations according to a plan. That plan may be as simple as an entrepreneur writing down a few goals on a napkin, or as complex as a massive set of instructions covering the day to day, month to month, year by year, or decade by decade actions required to maximize profits. However complex the plan may be, it will guide the business’s use of its capital for future growth. This entire process is dependent upon the extremely difficult practice of forecasting.
Kendall J. Anderson, CFA