Tree at sunset

Dare to be great (Marks)

You can’t do the same thing as everyone else and expect to outperform.*

Of course, it is not enough to be different. You also need to be right. Your odds of repeating your success are higher (but not guaranteed) if you were different and skilled rather than different and lucky.

Many feted investors where in the right place at the right time. The right style, the right geography, etc. We celebrate their foresight and brilliance even though, with thousands of investors, a few will have outsized success entirely by chance. They are the unskilled and lucky and highly unlikely to repeat.

For example, investors who have been overweight U.S. equities or U.S. growth stocks have outperformed. But is that any surprise? The U.S. has been the best performing market over the last decade. How likely is it that U.S. will outperform the next decade? I’d bet against it.

Similarly, those who have TAKEN THE MOST RISK the last 11-12 years have outperformed. Were they prescient or lucky? Who knows? I’m sure they’ve crafted a compelling narrative about their unique insight, their research process, etc. that credits their skill (not luck).

There is nothing reliable to be learned about making money. If there were, study would be intense and everyone with a positive IQ would be rich.
– John Kenneth Galbraith

Even if you are right and willing to be different, you still must execute well (and stay the course, especially when it is hard!). As described by David Swensen, “…active management strategies demand uninstitutional behavior from institutions, creating a paradox that few can unravel.”

If outperforming were as simple as picking the asset classes with the best historical returns or the managers with the best 3 or 5-year trailing returns, then outperforming would be easy and we’d all be rich. And yet that’s what many institutions (and individuals) do.

We chase returns. We look at other institutions and individuals that have been successful and try to emulate them. We tend to forget, though, that what made them successful today is often what they were doing 5, 10 or 15 years ago. Or they could just have been lucky!

The people that rise to the top of a profession often succeeded by following a particular strategy. How likely are they to abandon what worked for them for 15-20+ years? So, as a result, most continue to do what they did in the past and change happens glacially, if at all. There’s comfort that comes from doing what you know and what everyone else is doing.

However, “…unusual success cannot lie in doing the obvious” (Howard Marks). “Non-consensus ideas have to be lonely…consensus ideas that are popular, widely held or intuitively obvious are an oxymoron” (Howard Marks). I’d bet that those who will outperform over the next decade won’t have portfolios that look like everyone else’s today.**

*inspired by Dare to be Great, Howard Marks (2006).

**of course, this isn’t a license to take outsized risk.

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