In investment world, the experts are convinced that a portfolio needs to
be diversified especially when you are managing public money. It is better to
follow conventional behavior rather than to feel sorry later which may have
many repercussions like compensation cuts, job loss, embarrassment, unpleasant
headlines et cetera. However, when you set a path where you dare to be
different rather than a part of the herd, you are supposed to take a different
route with Unconventional Behavior for
Favorable Outcomes.
Howard Marks,
one of the World’s most renowned Portfolio Manager and Chairman of Oaktree
Clients portrays a similar story in his latest memo, “Dare
to Be Great II” (the
first memo on “Dare
to Be Great”, he had written in mid 2006). He says if you want to
be an outstanding wealth creator, you need to be different with different
outset. In his words,
“The real question is whether you dare to do things that are necessary
in order to be great. Are you willing to be different, and are you willing to
be wrong? In order to have a chance at great results, you have to be open to
being both.”
He says that an investor can’t take the same actions as everyone else
and expects to outperform. It ought to be different – you have to assemble a
portfolio that is different from those held by most other investors.
He suggested a two-by-two matrix along with a rationale.
“Only
if your behavior is unconventional is your performance likely to be
unconventional…and only if your judgments are superior is your performance
likely to be above average”
For those who define investment success as being “average or better,”
three of the four cells of the matrix represent satisfactory outcomes. But if
you define success strictly as being superior, only one of the four will do,
and it requires unconventional behavior.
So, what needs to be done to act different? He says, 1) being active in unusual market niches, 2)
buying things other haven’t found, 3) don’t like or consider too risky to
touch, 4) avoiding market darlings that the crowd thinks can’t lose, 5)
engaging in contrarian cycle timing, and 6) concentrating heavily in a small
number of things you think will deliver exceptional performance.
Noted but they look nice on paper…
Few points mentioned above may not be applicable in many developed
countries as the efficient markets hypothesis comes into picture and there is
hardly any known arbitrage. However, in India, where the equity market has
still not found its depth despite many years of its existence provides the
perfect place to replicate all unconventional behavior. The word of caution is for
investors who are not willing to take risks and are happy to take home an
average return. But for investor or portfolio manager or those who has
some sense in financial market can play different to get above-average results
with favorable outcomes.
Is it easy to
be different?
Howard quotes from Pioneering
Portfolio Management by David Swensen of Yale (also my favorite Asset
Allocator; you can listen his one of his lecture on Portfolio Management and Asset Allocation)
“Establishing
and maintaining an unconventional investment profile requires acceptance of
uncomfortably idiosyncratic portfolios, which frequently appear downright
imprudent in the eyes of conventional wisdom”
Non-consensus
ideas need to be alone, if you want to achieve above average results.
For kissing success, you need to witness a fail
If you are on
a path where you have not tasted any defeats or have not committed any
mistakes, then you may not get extraordinary results. You have to give yourself a chance
to fail; learn from your mistakes.
The above
matrix says that since the conventional behavior is sure to produce average
performance, people who want to be above average can’t expect to get there by
engaging in conventional behavior. Their behavior has to be different. And in
the course of trying to be different and better, they have to bear the risk of
being different and worse. Superior skills can increase the expected benefit
from concentration and leverage.
He further
states that superior investment results can only stem from a better-than-average
ability to figure out when risk-taking will lead to fain and when it will end
in loss. There is no alternative.
Dare to Look Wrong
He states, “This
is really the bottom-line: not whether you dare to be different or to be wrong,
but whether you dare to look wrong.” In order to get results,
investment manager accept that they will make mistakes to make correct
investment decisions. However, the real challenge is few people expect to find
a lot of sure things or achieve a perfect batting average.
In a nutshell,
we have to believe that you need to behave differently with unconventional
behavior to achieve above average results. Unconventional behavior is the only
road to superior investment results, but it isn’t for everyone. In addition to
superior skill, successful investing requires the ability to look wrong for a
while and survive some mistakes.
Rightly said, it isn’t for weak heart investors who
can’t see losses.
