Persuasion Time

Last week, I learned that a friend of mine had a heart attack and had to have quadruple-bypass surgery.  This news was particularly surprising to me because this friend has been in excellent shape for as long as I have known him and because he is a martial arts expert.  In fact, he teaches classes in his discipline, and has done so for many years.  Early signs are all encouraging and the doctors think my friend has a good chance of a full recovery.

One part of his wife’s e-mail to me struck a chord. She wrote, “Apparently he has been living with heart disease all these years and didn’t know it because the Kung Fu has kept his heart healthy.”  For some strange reason this fact (his hard work compensating for a serious problem) got me thinking about the investing process.

Imagine yourself a factory worker.  You put in your 8-hour shift making widgets.  At the end of the shift you can see clearly the fruits of your labors – several pallets of widgets all nicely stacked and packaged, ready for shipment.

Now imagine yourself a professional investor.  You put in your 8-hour shift (fantasy!) doing your thing.  At the end of the day, what have you produced?  No widgets stacked in the corner.  Your output is opinions, analysis, and maybe some trading.  Some days you might not have any visible production of any kind.  And you get paid for this?!

Herein lies one fundamental difference between the investment business and nearly everything else – a hard day’s work often produces no visible benefit.  Sometime after a hard day’s work, the market will tank at the day’s end.  On those days, despite your hard work, the only visible output is losses!

I recall one day in late August, talking to a prop trader at the firm where I worked.  He had been working hard every day to make money for his desk.  On that hot August day, he was going home a dejected man – he had lost in one day all of the profits he had made so far that year.  This is the kind of experience that could be replicated in only few other professions (such as farmers, maybe).

I recall working for another firm whose management struggled with understanding the investment business.  This firm’s core business was commercial banking, where the linkage between hard work and output was well understood.  Management concluded that all one needed to do to make money in the stock market was to work hard, in other words, more hours.  In those times when the market was falling, their “logic” suggested that we just needed to work even harder (more hours).  Our attempts to point out the fundamental flaw in this line of reasoning were met with blank stares.

They also held firm the notion that active management meant active trading.  So after I took charge of the portfolio they quickly noticed that the fund’s turnover had gone down (after all, value investors tend to trade less actively than other investor types).  They encouraged me to trade more, ostensibly to help be achieve better returns.  Here too any pushback on my part had no impact on their opinions.  So, every month I would log a sizable number of very small trades that kept them happy without significantly impacting the returns of the portfolio.

So, what’s the point of all of this?  First, the investment process is complicated and perhaps unlike few other human endeavors (except farming, maybe).  This is one reason I feel compelled to write this blog.  The more people truly understand about the investment process, the better.  Second, in the investment process the linkage between hard work and performance is real, but rarely direct or linear.  I believe that my hard work will over time produce above market returns, but day to day it’s hard to measure my value added.  Third, I can invest however you want me to, or I can invest your funds my way and make you more money.  Fourth, stop and smell the roses.  Life is too precious and short not to take time to enjoy the journey.

This entry was posted on Monday, June 14th, 2010 at 1:40 pm and is filed under General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.