Archive for December 10th, 2008
Past Performance Is Not a Guarantee…
…(Nor even an Indication) of Future Performance.
Here’s an excellent example: The Stock Picker’s Defeat. The article is from today’s edition of The Wall Street Journal, and describes William H. Miller’s initial, long-term success and his subsequent (and recent) extreme lack of success while investing at Legg Mason.
It seems that for a long time, Mr. Miller had a reputation as a savvy investor. It seems that time might be past. Our guess is that his competency – high or low – hasn’t changed through the years, but it seems that his luck has changed for the worst, and unfortunately, luck often overwhelms competency.
We hope to some day understand how reputations are made – how people get to be financial geniuses – at least for a little while – or popular “modern” artists (although we doubt that we’ll ever understand that).
We don’t mean that we want to understand economic models of reputation. We understand those now, and we’ve not found them to be very helpful for our purposes.
We want to understand what causes or motivates people to lose their skepticism – if they had any to start with – and accept someone as, say, a can’t-lose “genius” investor or whatever rather than view him as a large risk (with, hopefully, a corresponding large expected return). What hope or psychological need permits such credulity?
Given the obvious roles of luck and good fortune – how fortunate we are to live now, to be born here, to have food, shelter, liberty, a blog, family, health, and on and on – in life and many endeavors, what causes folks to forget that luck and fortune and see certainty where none exists or where certainty may have existed but can easily disappear like a puff of smoke – just like the value of Mr. Miller’s investment funds?
For some reason – maybe not a good reason – it reminds us of the apocryphal Chesterton quote, “When a man stops believing in God he doesn’t then believe in nothing, he believes anything.” Maybe that includes magic investing skills, but we suspect that many of the devout are equally gullible.
Who says that modern man is no longer superstitious, especially where the markets are concerned?
