“It is always a silly thing to give advice, but to give good advice is absolutely fatal.”
*Dedicated to Max Patrick Connolly, born 20th September 2025.*
Get your Free
financial review
Perfection in a work of art, according to the French author Antoine de Saint-Exupery, is not achieved when there is nothing left to add, but when there is nothing left to take away. The German-American architect Ludwig Mies van der Rohe expressed the same sentiment more pithily, in just three words: “less is more”.
The more we think about the craft of investing, the more we believe these two ‘worldly philosophers’ were entirely right. It is not about complexity, but simplicity. Not ease, mind you, but simplicity. Less is undoubtedly more.
When you start out in the City, you are a sponge waiting to absorb whatever seemingly good ideas come your way. One of our favourite financial analysts, Russell Napier, has a great way of putting it: no other profession pays you so well just to learn on the job. (The idea that City folk have all the right answers is touching, but naïve.)
City firms – primarily though not exclusively investment banks – are good at silo thinking. That is to say, they are adept at squeezing their employees into narrower and narrower professional silos, until they become (hopefully) expert, but within an incredibly confining discipline. We saw this experience first-hand during our first decade in the business. While this correspondent always remained a generalist salesman of bonds, equally happy to search for apparent value in government debt, corporate debt, emerging market debt or structured products, we looked on as any number of traders began as generalists in government paper, then went on to trade German government debt, then went on to specialise in short-term German government debt, then went on to concentrate on the vagaries of 2-3 year German government debt, for example. The problem with specialisation of this type is that it leaves you open to sudden and catastrophic career obsolescence. Markets, like human nature, are fickle. Some product areas will turn out to be blind alleys, or blow up, or both.
It took us 10 years to make the transition from institutional fixed income sales to private wealth management. But that was when the scales really fell from our eyes, and we were able to see the markets for all they represent and in all their variety: stocks, bonds, currencies, commodities, funds, derivatives – the whole works. The problem with the ‘silo’ approach of the City is that it makes it difficult, if not impossible, to see the financial world in the round. Now we’d suggest that there are only two environments that offer this more holistic perspective on financial opportunities (with all the attendant risks, of course): private wealth management, and the type of unconstrained hedge fund investing known as ‘global macro’. Practically every other form of investing operates with a more tightly restricted toolset.
In this commentary, we’d like to candidly share with you what we wish we’d learned at the start of our career, 30+ years ago, since it would have saved us a great deal of time, not to mention heartache.
1: Less is more. We’d argue that there are three stages to investment discipline; at least, there have been to ours. In the first stage, which is how everyone sets out at the beginning of their City career, you think like a trader. Everything has a price, and you are supposed to have a view on everything. But like so many other superficial attempts at knowledge, this ‘view’ is a thousand miles across but just a millimetre deep. The ‘trading’ mentality is almost entirely responsive and reactive. It is inherently short term. We’re not knocking active traders; we just concede that a trading lifestyle is not for us. Which leads to lesson 1 ½: always invest in a way that fits your personality. If you are fundamentally risk averse (as we are), there is little point in taking explicitly big risks when objectively smaller risks will suffice.
The second stage of our own investment journey, then, was to stop thinking like a trader and to start thinking like an investor. Essentially, this involves having a longer term perspective, and simultaneously shrinking your investible universe. This also involves an appreciation and a recognition of those things that are, to all intents and purposes, impossible to call. The financial media can be a huge distraction here (see our later lesson # 4: go on a news diet).
The third and final stage, for those who are temperamentally up for it, is to progress from thinking like an investor to thinking like an owner. Once again, this raises the focus on the longer term, and once again it compresses one’s potential circle of investments down to those things that one genuinely cares about. We’re value investors, for example, so in the context of the listed stock markets, there are only ever going to be a comparative handful of companies that appeal to us in that regard. We hazard a guesstimate that as value investors, perhaps 95% of the stock market is now more or less irrelevant to us, so we’re not going to spend much time considering that 95%. We try and keep an open mind, but being realistic, there are plenty of sectors that will almost never become cheap enough, or whose earnings are transparent enough, or which display the required defensive characteristics, for us to be interested in owning them. Today those sectors would probably include AI, biotech and banking. The sectors, on the other hand, that leap out as being potentially attractive would include family-run businesses, diversified holding companies, and commodity-related businesses on sensible valuations with long ‘life of mine’. And anything run by principled, shareholder-friendly management is always worth considering.
2: Absolute returns are the only ones worth striving for. This conclusion leapt out at us the very first time we encountered Peter L. Bernstein’s Against the Gods (recommended reading, by the way – a somewhat more expansive reading list will follow at the end of this issue). Within Bernstein’s impressive history of risk, we came across the following observation, by the Swiss mathematician and all-around Renaissance Man, Daniel Bernoulli. Bernoulli suggested that, for anyone managing money for wealthy people – which has been our day-job for the past quarter-century or so – the important thing was not to lose it. As Bernoulli put it, for anyone tasked with stewarding the wealth of the rich,
“The practical utility of any gain in value inversely relates to the size of the portfolio.”
Or, in plainer English, wealthy people have already made their money – they just don’t want to lose it. Bernoulli recognised, centuries before the formal birth of so-called behavioural investing, that people’s attitudes to profits and losses are not the same. Losses matter more. Perhaps especially for wealthy investors who simply don’t need to take high risks in the pursuit of high returns – because they’ve already amassed their pot of wealth to begin with.
What we took almost immediately from this deceptively simple observation was an awareness that while absolute return investing should be relevant to just about everybody, relative return investing was, almost by definition, a nonsense. If one accepts that relative return investing is largely non-sensical, then indexation, too, looks largely like a waste of time. You cannot take relative returns to the bank, especially if they’re negative. So within our own wealth management business, the only benchmark that really matters to us is either a cash-plus one, or an inflation-plus one. Having a benchmark that links your hurdle rate to the performance of a stock or bond index, or a combination of the two, predestines your portfolio to periods of sub-par performance. Trying to achieve positive returns on an ongoing basis is surely more desirable.
3: Asset allocation trumps security selection. Even the most casual consideration of a sensibly diversified portfolio suggests this must be true. The rules of thumb we use within our own business go as follows. Within a diversified client portfolio we typically allocate across ‘Cash and Bonds’ (minimal cash today, and no bonds whatsoever); ‘Unconstrained (Value) Equities’; ‘Systematic Trend-following Funds’ and ‘Real Assets’. Each of these asset classes is typically weakly correlated against each other, which gives you genuine diversification, as you don’t want large parts of your portfolio to move lock-step with the rest. And within those asset classes, we typically limit any individual fund exposure to a maximum of 10% of the overall portfolio, and we typically limit individual security (or stock) exposure to a maximum of 3% or 4% of the overall portfolio.
Given these self-imposed limits, it’s clear that our largest asset class exposure, currently to ‘real assets’, will have a far larger bearing on risks and returns than that to ‘cash and bonds’, at perhaps 5%. This is not to say that security or stock selection is unimportant. It’s clearly important. But the asset allocation decision carries more weight. In this respect, it’s more important to be approximately right than to be precisely wrong. Since we cannot know what the future holds, it seems to us sensible to carry some exposure to each asset class, even to cash, despite its fundamental unattractiveness in a systemically inflationary and increasingly low-trust world. By exactly the same token, it seems madness to allocate almost everything to any one asset class, even if that asset class is equities – which, over two centuries within the Anglo-Saxon financial world have been the best performing asset class of all of them. Because we then have to consider the relative merits and demerits of those assets and right now, both bonds and stocks are, by and large, close to their most expensive levels in history.
4: Go on a news diet. To put it another way, ‘Turn off and drop out: why ignoring the news will make you a better investor’.
The news at any time is little more than a distraction. The essayist and risk analyst Nassim Nicholas Taleb has said that he doesn’t consume news on the basis that it takes up too much time; if there’s something important going on, sooner or later he’ll hear about it from friends at a dinner party. Going ‘cold turkey’ on news is difficult to pull off, but making some attempt at abstention will free up your own time for more useful endeavours instead.
Financial news, on the other hand, can be more than just a distraction. It’s often poorly informed, or absolutely wrong (if one can suggest such a thing), and it can lead you into action that will leave your finances in worse shape than if you’d never engaged with the news to begin with.
We have referenced before the work of Thomas Schuster at the Institute for Communication and Media Studies at Leipzig University. Schuster, to our mind, has published the most damning indictment of financial news there can be:
“The media select, they interpret, they emotionalize and they create facts. The media not only reduce reality by lowering information density. They focus reality by accumulating information where ‘actually’ none exists. A typical stock market report looks like this: Stock X increased because… Index Y crashed due to… Prices Z continue to rise after… Most of these explanations are post-hoc rationalizations. An artificial logic is created, based on a simplistic understanding of the markets, which implies that there are simple explanations for most price movements; that price movements follow rules which then lead to systematic patterns; and of course that the news disseminated by the media decisively contribute to the emergence of price movements.”
We have written before that there is only one form of information that is pure about the financial markets, and that is the price at which things trade, as set in an honest exchange between buyers and sellers. The price at which things have traded is non-negotiable, but a matter of plain historical fact. As to why that price arose – that is supposition. And as the Roman Emperor Marcus Aurelius put it,
“Everything we hear is an opinion, not a fact. Everything we see is a perspective, not the truth.”
But price is fact. What drove the price, however, is open to infinite conjecture.
5: Most economics is nonsense. This is a theme we develop at some length in our book, Investing Through the Looking Glass. But this is not economics-envy on our part. Rather, it is a conclusion we have come to on the basis of over a quarter of a century as investment practitioners within the financial markets. If we were to reduce the argument down to its bare bones it would be as follows:
Economics is nonsense because it attempts to treat as science what is the plainly behavioural interaction of billions of people within the modern economy. Psychology would be a more useful form of study to gauge the intentions, hopes and fears of all those ‘economic agents’ busily transacting with each other. History would not be a bad subject to study either as a practical alternative.
If a science cannot give rise to a testable and falsifiable hypothesis, it is not a science. Economics is therefore not a science, not least because it has no predictive value. Remember the dark warnings we were all given ahead of the Brexit referendum to stay within or leave the EU ? So far none of them has come to pass.
Gregory Mankiw has outlined Ten Principles of Economics which summarise, a little more modestly, what this so-called science is really all about:
- People face trade-offs
- The cost of something is what you give up to get it
- Rational people think at the margin
- People respond to incentives
- Trade can make everyone better off
- Markets are usually a good way to organise economic activity
- Governments can sometimes improve market outcomes
- A country’s standard of living depends on its ability to produce goods and services
- Prices rise when the government prints too much money
- Society faces a short-run trade-off between inflation and unemployment.
Of these we would especially highlight Number 4. People respond to incentives. Everything else is detail.
6: Value is the best performing investment strategy over the longer term, but you need genuine patience and discipline to make it work for you.
As a sign of just how idiotic and conflicted the financial services business is, consider the article from Research Affiliates, How not to get fired with smart beta investing, which you can download here. Research Affiliates show quite clearly that ‘value’ as an investment style is the strategy that tends to generate the highest return over a long term investment horizon. They also go on to show that recommending ‘value’ investments or funds is also the strategy that is most likely to get a financial adviser or consultant fired over a three to five year period.
Patience isn’t just important, it’s crucial.
The same goes for discipline. Seth Klarman has been quoted as saying that there’s a “value gene” and that you’re either born with it, or you’re not. Similarly, Warren Buffett has compared value investing to an inoculation: “it either takes or it doesn’t”.
What do we mean by ‘value’ ?
The term means different things to different people. We would define it, firstly, by saying it’s about buying dollar bills for forty cents. In other words, it’s about identifying decent businesses, and then consciously only buying them when they can be purchased at a meaningful discount to their inherent value. This is what Benjamin Graham wrote about in The Intelligent Investor, which remains, for our money, the definitive guide to value investing.
The beauty of combining high quality with outright cheapness in valuation terms is that it gives you a ‘margin of safety’, in Graham’s words. This is more than usually important today given the outright expensiveness of so many different markets. Because we happen to think that market timing is impossible, we prefer to be more or less fully invested. But it’s one thing to be fully invested in “markets” per se – which is why we’re wary of tracker funds and certain types of ETFs, because they tend to be indiscriminate when it comes to market exposure. It’s another to be discerning. So focusing on explicit ‘value’ means we can maintain a relatively high market exposure – admittedly to ‘value’ stocks versus any other type – whilst still maintaining some degree of a ‘margin of safety’ in the event that the market suddenly falls for some reason. And clearly, one can choose to complement one’s equity investments with other asset classes, as we do, to achieve further immunisation against sharp or enduring market falls.
So ‘value’ investing isn’t necessarily easy, but whoever said any form of successful investing was ? Simple not easy is a pretty good way of putting it.
Ben Carlson cites Professor Karl Pillemer and his book Thirty Lessons for Living: Tried and True Advice from the wisest Americans. Pillemer interviewed thousands of people over the age of 65 to glean some wisdom on a variety of life lessons. Carlson particularly appreciated what this group didn’t say about their experiences:
“No one – not a single person out of a thousand – said that to be happy you should try to work as hard as you can to make money to buy the things you want.
“No one – not a single person – said it’s important to be at least as wealthy as the people around you, and if you have more than they do it’s real success.
“No one – not a single person – said you should choose your work based on your desired future earning power.
“Now it may sound absurdly obvious worded this way. But this is in fact how many people operate on a day-to-day basis. The experts did not say these things; indeed almost no one said anything remotely like them. Instead they consistently urged finding a way of earning enough to live on without condemning yourself to a job you dislike.”
Pillemer also listed five things he learned from this group about regret reduction that can be easily applied to the younger generation:
- Always be honest. Avoid acts of dishonesty, both big and small. Most people suffer from serious regret later in life if they have been less than fair and square.
- Say yes to opportunities. When offered a new opportunity or challenge, you are much less likely to regret saying yes and more likely to regret turning it down.
- Travel more. Travel while you can, sacrificing other things if necessary to do so. Most people look back on their travel adventures (big and small) as highlights of their lives and regret not having travelled more.
- Choose a mate with extreme care. The key is not to rush the decision, taking all the time needed to get to know the prospective partner and to determine your compatibility over the long-term.
- Say it now. People wind up saying the sad words “it might have been” by failing to express themselves before it’s too late. Don’t believe the “ghost whisperers” – the only time you can share your deepest feelings is while people are still alive.
As Ben Carlson puts it,
“One of the best ways to plan ahead for the future, financial or otherwise, is to ask people who are older than you what they wish they would have done at your age to better prepare for what’s to come.”
Which is, in a sense, what we hope we’ve presented here.
Recommended further reading
Peter L. Bernstein, Against the Gods: the remarkable story of risk
Benjamin Graham, The Intelligent Investor and Security Analysis
Edwin Lefèvre, Reminiscences of a Stock Operator
Michael Lewis, Liar’s Poker and The Undoing Project: a Friendship that changed the world
Jack Schwager, Market Wizards and The New Market Wizards
David Swensen, Pioneering Portfolio Management and Unconventional Success
………….
As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio – with no obligation at all:
Get your Free
financial review
…………
Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com.
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and also in systematic trend-following funds.
“It is always a silly thing to give advice, but to give good advice is absolutely fatal.”
*Dedicated to Max Patrick Connolly, born 20th September 2025.*
Get your Free
financial review
Perfection in a work of art, according to the French author Antoine de Saint-Exupery, is not achieved when there is nothing left to add, but when there is nothing left to take away. The German-American architect Ludwig Mies van der Rohe expressed the same sentiment more pithily, in just three words: “less is more”.
The more we think about the craft of investing, the more we believe these two ‘worldly philosophers’ were entirely right. It is not about complexity, but simplicity. Not ease, mind you, but simplicity. Less is undoubtedly more.
When you start out in the City, you are a sponge waiting to absorb whatever seemingly good ideas come your way. One of our favourite financial analysts, Russell Napier, has a great way of putting it: no other profession pays you so well just to learn on the job. (The idea that City folk have all the right answers is touching, but naïve.)
City firms – primarily though not exclusively investment banks – are good at silo thinking. That is to say, they are adept at squeezing their employees into narrower and narrower professional silos, until they become (hopefully) expert, but within an incredibly confining discipline. We saw this experience first-hand during our first decade in the business. While this correspondent always remained a generalist salesman of bonds, equally happy to search for apparent value in government debt, corporate debt, emerging market debt or structured products, we looked on as any number of traders began as generalists in government paper, then went on to trade German government debt, then went on to specialise in short-term German government debt, then went on to concentrate on the vagaries of 2-3 year German government debt, for example. The problem with specialisation of this type is that it leaves you open to sudden and catastrophic career obsolescence. Markets, like human nature, are fickle. Some product areas will turn out to be blind alleys, or blow up, or both.
It took us 10 years to make the transition from institutional fixed income sales to private wealth management. But that was when the scales really fell from our eyes, and we were able to see the markets for all they represent and in all their variety: stocks, bonds, currencies, commodities, funds, derivatives – the whole works. The problem with the ‘silo’ approach of the City is that it makes it difficult, if not impossible, to see the financial world in the round. Now we’d suggest that there are only two environments that offer this more holistic perspective on financial opportunities (with all the attendant risks, of course): private wealth management, and the type of unconstrained hedge fund investing known as ‘global macro’. Practically every other form of investing operates with a more tightly restricted toolset.
In this commentary, we’d like to candidly share with you what we wish we’d learned at the start of our career, 30+ years ago, since it would have saved us a great deal of time, not to mention heartache.
1: Less is more. We’d argue that there are three stages to investment discipline; at least, there have been to ours. In the first stage, which is how everyone sets out at the beginning of their City career, you think like a trader. Everything has a price, and you are supposed to have a view on everything. But like so many other superficial attempts at knowledge, this ‘view’ is a thousand miles across but just a millimetre deep. The ‘trading’ mentality is almost entirely responsive and reactive. It is inherently short term. We’re not knocking active traders; we just concede that a trading lifestyle is not for us. Which leads to lesson 1 ½: always invest in a way that fits your personality. If you are fundamentally risk averse (as we are), there is little point in taking explicitly big risks when objectively smaller risks will suffice.
The second stage of our own investment journey, then, was to stop thinking like a trader and to start thinking like an investor. Essentially, this involves having a longer term perspective, and simultaneously shrinking your investible universe. This also involves an appreciation and a recognition of those things that are, to all intents and purposes, impossible to call. The financial media can be a huge distraction here (see our later lesson # 4: go on a news diet).
The third and final stage, for those who are temperamentally up for it, is to progress from thinking like an investor to thinking like an owner. Once again, this raises the focus on the longer term, and once again it compresses one’s potential circle of investments down to those things that one genuinely cares about. We’re value investors, for example, so in the context of the listed stock markets, there are only ever going to be a comparative handful of companies that appeal to us in that regard. We hazard a guesstimate that as value investors, perhaps 95% of the stock market is now more or less irrelevant to us, so we’re not going to spend much time considering that 95%. We try and keep an open mind, but being realistic, there are plenty of sectors that will almost never become cheap enough, or whose earnings are transparent enough, or which display the required defensive characteristics, for us to be interested in owning them. Today those sectors would probably include AI, biotech and banking. The sectors, on the other hand, that leap out as being potentially attractive would include family-run businesses, diversified holding companies, and commodity-related businesses on sensible valuations with long ‘life of mine’. And anything run by principled, shareholder-friendly management is always worth considering.
2: Absolute returns are the only ones worth striving for. This conclusion leapt out at us the very first time we encountered Peter L. Bernstein’s Against the Gods (recommended reading, by the way – a somewhat more expansive reading list will follow at the end of this issue). Within Bernstein’s impressive history of risk, we came across the following observation, by the Swiss mathematician and all-around Renaissance Man, Daniel Bernoulli. Bernoulli suggested that, for anyone managing money for wealthy people – which has been our day-job for the past quarter-century or so – the important thing was not to lose it. As Bernoulli put it, for anyone tasked with stewarding the wealth of the rich,
“The practical utility of any gain in value inversely relates to the size of the portfolio.”
Or, in plainer English, wealthy people have already made their money – they just don’t want to lose it. Bernoulli recognised, centuries before the formal birth of so-called behavioural investing, that people’s attitudes to profits and losses are not the same. Losses matter more. Perhaps especially for wealthy investors who simply don’t need to take high risks in the pursuit of high returns – because they’ve already amassed their pot of wealth to begin with.
What we took almost immediately from this deceptively simple observation was an awareness that while absolute return investing should be relevant to just about everybody, relative return investing was, almost by definition, a nonsense. If one accepts that relative return investing is largely non-sensical, then indexation, too, looks largely like a waste of time. You cannot take relative returns to the bank, especially if they’re negative. So within our own wealth management business, the only benchmark that really matters to us is either a cash-plus one, or an inflation-plus one. Having a benchmark that links your hurdle rate to the performance of a stock or bond index, or a combination of the two, predestines your portfolio to periods of sub-par performance. Trying to achieve positive returns on an ongoing basis is surely more desirable.
3: Asset allocation trumps security selection. Even the most casual consideration of a sensibly diversified portfolio suggests this must be true. The rules of thumb we use within our own business go as follows. Within a diversified client portfolio we typically allocate across ‘Cash and Bonds’ (minimal cash today, and no bonds whatsoever); ‘Unconstrained (Value) Equities’; ‘Systematic Trend-following Funds’ and ‘Real Assets’. Each of these asset classes is typically weakly correlated against each other, which gives you genuine diversification, as you don’t want large parts of your portfolio to move lock-step with the rest. And within those asset classes, we typically limit any individual fund exposure to a maximum of 10% of the overall portfolio, and we typically limit individual security (or stock) exposure to a maximum of 3% or 4% of the overall portfolio.
Given these self-imposed limits, it’s clear that our largest asset class exposure, currently to ‘real assets’, will have a far larger bearing on risks and returns than that to ‘cash and bonds’, at perhaps 5%. This is not to say that security or stock selection is unimportant. It’s clearly important. But the asset allocation decision carries more weight. In this respect, it’s more important to be approximately right than to be precisely wrong. Since we cannot know what the future holds, it seems to us sensible to carry some exposure to each asset class, even to cash, despite its fundamental unattractiveness in a systemically inflationary and increasingly low-trust world. By exactly the same token, it seems madness to allocate almost everything to any one asset class, even if that asset class is equities – which, over two centuries within the Anglo-Saxon financial world have been the best performing asset class of all of them. Because we then have to consider the relative merits and demerits of those assets and right now, both bonds and stocks are, by and large, close to their most expensive levels in history.
4: Go on a news diet. To put it another way, ‘Turn off and drop out: why ignoring the news will make you a better investor’.
The news at any time is little more than a distraction. The essayist and risk analyst Nassim Nicholas Taleb has said that he doesn’t consume news on the basis that it takes up too much time; if there’s something important going on, sooner or later he’ll hear about it from friends at a dinner party. Going ‘cold turkey’ on news is difficult to pull off, but making some attempt at abstention will free up your own time for more useful endeavours instead.
Financial news, on the other hand, can be more than just a distraction. It’s often poorly informed, or absolutely wrong (if one can suggest such a thing), and it can lead you into action that will leave your finances in worse shape than if you’d never engaged with the news to begin with.
We have referenced before the work of Thomas Schuster at the Institute for Communication and Media Studies at Leipzig University. Schuster, to our mind, has published the most damning indictment of financial news there can be:
“The media select, they interpret, they emotionalize and they create facts. The media not only reduce reality by lowering information density. They focus reality by accumulating information where ‘actually’ none exists. A typical stock market report looks like this: Stock X increased because… Index Y crashed due to… Prices Z continue to rise after… Most of these explanations are post-hoc rationalizations. An artificial logic is created, based on a simplistic understanding of the markets, which implies that there are simple explanations for most price movements; that price movements follow rules which then lead to systematic patterns; and of course that the news disseminated by the media decisively contribute to the emergence of price movements.”
We have written before that there is only one form of information that is pure about the financial markets, and that is the price at which things trade, as set in an honest exchange between buyers and sellers. The price at which things have traded is non-negotiable, but a matter of plain historical fact. As to why that price arose – that is supposition. And as the Roman Emperor Marcus Aurelius put it,
“Everything we hear is an opinion, not a fact. Everything we see is a perspective, not the truth.”
But price is fact. What drove the price, however, is open to infinite conjecture.
5: Most economics is nonsense. This is a theme we develop at some length in our book, Investing Through the Looking Glass. But this is not economics-envy on our part. Rather, it is a conclusion we have come to on the basis of over a quarter of a century as investment practitioners within the financial markets. If we were to reduce the argument down to its bare bones it would be as follows:
Economics is nonsense because it attempts to treat as science what is the plainly behavioural interaction of billions of people within the modern economy. Psychology would be a more useful form of study to gauge the intentions, hopes and fears of all those ‘economic agents’ busily transacting with each other. History would not be a bad subject to study either as a practical alternative.
If a science cannot give rise to a testable and falsifiable hypothesis, it is not a science. Economics is therefore not a science, not least because it has no predictive value. Remember the dark warnings we were all given ahead of the Brexit referendum to stay within or leave the EU ? So far none of them has come to pass.
Gregory Mankiw has outlined Ten Principles of Economics which summarise, a little more modestly, what this so-called science is really all about:
Of these we would especially highlight Number 4. People respond to incentives. Everything else is detail.
6: Value is the best performing investment strategy over the longer term, but you need genuine patience and discipline to make it work for you.
As a sign of just how idiotic and conflicted the financial services business is, consider the article from Research Affiliates, How not to get fired with smart beta investing, which you can download here. Research Affiliates show quite clearly that ‘value’ as an investment style is the strategy that tends to generate the highest return over a long term investment horizon. They also go on to show that recommending ‘value’ investments or funds is also the strategy that is most likely to get a financial adviser or consultant fired over a three to five year period.
Patience isn’t just important, it’s crucial.
The same goes for discipline. Seth Klarman has been quoted as saying that there’s a “value gene” and that you’re either born with it, or you’re not. Similarly, Warren Buffett has compared value investing to an inoculation: “it either takes or it doesn’t”.
What do we mean by ‘value’ ?
The term means different things to different people. We would define it, firstly, by saying it’s about buying dollar bills for forty cents. In other words, it’s about identifying decent businesses, and then consciously only buying them when they can be purchased at a meaningful discount to their inherent value. This is what Benjamin Graham wrote about in The Intelligent Investor, which remains, for our money, the definitive guide to value investing.
The beauty of combining high quality with outright cheapness in valuation terms is that it gives you a ‘margin of safety’, in Graham’s words. This is more than usually important today given the outright expensiveness of so many different markets. Because we happen to think that market timing is impossible, we prefer to be more or less fully invested. But it’s one thing to be fully invested in “markets” per se – which is why we’re wary of tracker funds and certain types of ETFs, because they tend to be indiscriminate when it comes to market exposure. It’s another to be discerning. So focusing on explicit ‘value’ means we can maintain a relatively high market exposure – admittedly to ‘value’ stocks versus any other type – whilst still maintaining some degree of a ‘margin of safety’ in the event that the market suddenly falls for some reason. And clearly, one can choose to complement one’s equity investments with other asset classes, as we do, to achieve further immunisation against sharp or enduring market falls.
So ‘value’ investing isn’t necessarily easy, but whoever said any form of successful investing was ? Simple not easy is a pretty good way of putting it.
Ben Carlson cites Professor Karl Pillemer and his book Thirty Lessons for Living: Tried and True Advice from the wisest Americans. Pillemer interviewed thousands of people over the age of 65 to glean some wisdom on a variety of life lessons. Carlson particularly appreciated what this group didn’t say about their experiences:
“No one – not a single person out of a thousand – said that to be happy you should try to work as hard as you can to make money to buy the things you want.
“No one – not a single person – said it’s important to be at least as wealthy as the people around you, and if you have more than they do it’s real success.
“No one – not a single person – said you should choose your work based on your desired future earning power.
“Now it may sound absurdly obvious worded this way. But this is in fact how many people operate on a day-to-day basis. The experts did not say these things; indeed almost no one said anything remotely like them. Instead they consistently urged finding a way of earning enough to live on without condemning yourself to a job you dislike.”
Pillemer also listed five things he learned from this group about regret reduction that can be easily applied to the younger generation:
As Ben Carlson puts it,
“One of the best ways to plan ahead for the future, financial or otherwise, is to ask people who are older than you what they wish they would have done at your age to better prepare for what’s to come.”
Which is, in a sense, what we hope we’ve presented here.
Recommended further reading
Peter L. Bernstein, Against the Gods: the remarkable story of risk
Benjamin Graham, The Intelligent Investor and Security Analysis
Edwin Lefèvre, Reminiscences of a Stock Operator
Michael Lewis, Liar’s Poker and The Undoing Project: a Friendship that changed the world
Jack Schwager, Market Wizards and The New Market Wizards
David Swensen, Pioneering Portfolio Management and Unconventional Success
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As you may know, we also manage bespoke investment portfolios for private clients internationally. We would be delighted to help you too. Because of the current heightened market volatility we are offering a completely free financial review, with no strings attached, to see if our value-oriented approach might benefit your portfolio – with no obligation at all:
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Tim Price is co-manager of the VT Price Value Portfolio and author of ‘Investing through the Looking Glass: a rational guide to irrational financial markets’. You can access a full archive of these weekly investment commentaries here. You can listen to our regular ‘State of the Markets’ podcasts, with Paul Rodriguez of ThinkTrading.com, here. Email us: info@pricevaluepartners.com.
Price Value Partners manage investment portfolios for private clients. We also manage the VT Price Value Portfolio, an unconstrained global fund investing in Benjamin Graham-style value stocks and also in systematic trend-following funds.
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