HUMMONEY - The Psychology of Biology (Perspective)

- by Greg Lewin

Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.” John Maynard Keynes.

This is unquestionably one of my favorite quotes. It reveals more about an investor’s frailty than any other thought I can find. To this point, the Wall Street Journal recently published an article entitled “So That’s Why Investors Can’t Think for Themselves.” In this article they explore a recent study published in a scientific journal which concludes that the value one places on something is highly correlated to the opinions of others. If others agree with you the value rises to you, and if they disagree the value declines.  Interestingly, when monitoring the areas of your brain that regulate such emotions as pleasure, they actually found increasing levels of activity as others joined in support. In other words, at a biological level, going with the crowd, conformity, actually feels good.

So now investors have a new and higher hurdle to jump over because the physiology of the body is actually encouraging the drive to consensus and most probably discouraging critical thinking. This is highly problematic because the quest for great investing demands unconventional views. Charlie Munger says that the obligation of any great investor is to seek out disconfirming evidence to kill your own ideas. Now we understand that the obstacles are not a matter of education but genetic evolution.

So what can you do? We have begun to piece together some articles to help you develop investment disciplines which can make you a better investor, and I would encourage you to reread some of them. But to this specific problem I can think of only one rational and disciplined response: slow down. This is a more powerful thought than you think. The world is increasingly complex, global and fast paced. The internet has certainly done a great deal to usher in this new reality. In response, the stock market has become much more short-term oriented, seeking out crowd behavior to make returns. We have argued previously that this crowd behavior has led to the marginalizing of returns which has produced the poor investment performance of the past decade plus. In my opinion, to simply slow down puts you on an unconventional path and thus offers the investor the opportunity to create unconventional returns. And possibly, it might even feel good.      

---The author, HUMMoney contributor Greg Lewin is currently a General Partner at TLF Capital, an investment management firm. During the past 26 years he has been a senior money manager or partner in Wall Street firms including Neuberger Berman, Charter Oak Partners and Sailfish Capital.  

HUMMONEY - The Devaluation of Knowledge (Perspective)

- by Greg Lewin

"Those that fail to learn from history are doomed to repeat it.”

- Winston Churchill

We just finished the worst decade ever for stock market performance. What did you learn from it? What changes have you made? Before you answer these questions you probably should be able to answer the most basic question: Why did it happen? With that knowledge in hand maybe then you can answer the prior two questions and plot a new more profitable future.

There has been a lot of coverage and opinions about why the last decade’s investment performance was historically terrible. The reasons given cover all the traditional topics such as debt levels, politics, policy, war, terrorism, excessive risk taking, etc. These all have a place but in our assessment are terribly incomplete. We say this because if you look back at many different market cycles, combinations of these factors were always present and never did they result in such calamitous results. So what was unique to this period of time that could have made the financial performance so much worse than all the previous market cycles?  We believe that it was the change in the market place itself that was the cause of the poor performance. We are referring to the explosion of information, instant access, available to everyone everywhere 24/7.

Prior to the year 2000 broadband penetration of US households was approximately 3%. In the following 5 years penetration climbed to 60% and now is above 80%. The standards for 3G wireless communications were not even established until 1999, and the first 3G phone was introduced in Japan in October 2001. The first Blackberry 2- way pager was brought to market in 1999 and their first smart phone arrived in 2002. And we are all familiar with the pace of wireless adoption that followed these and many other 3G wireless devices to come. So the primary tools used in the ubiquitous distribution of rich media and content - broadband for the internet and 3G wireless phones - arrived just at the start of the decade and rapidly expanded in the following years.

Wall Street is a market place where knowledge is sold for profit. Since profits in this arena are black and white the price a client had been willing to pay could be quite handsome. When it comes to knowledge its value is inversely proportional to the number of people who share it: the fewer that share useful information the more valuable it is. And this is how the internet hijacked Wall Street. The old model relied on in depth research into companies, industries and markets to generate insight, but now the internet makes it virtually impossible to limit the distribution of the knowledge product to just those willing to pay.  Information now finds its way to the net and then explodes exponentially. As it does it depreciates rapidly in value. Therefore, if you can’t charge a reasonable price for your efforts, why invest money and resources in generating the product? In my way of thinking, knowledge has been devalued and in exchange we now produce and distribute information (facts and figures with a thin layer of opinion spread on top), which has very little investment value. As my father told me, you get what you pay for. The natural response of Wall Street and the investors they service is to try to capitalize on the more modest value of information through rapid fire high volume trading. Now the process in pursuit of profit is trying to capture pennies versus the old model which focused on dollars.   

A second by-product of the post internet environment is that Wall Street is now both servicing investors and competing with them. Not only are they in the business of collecting fees and commissions but in a move to capitalize on the post knowledge revolution they have become amongst the biggest traders of securities for their own account.  Now you pay the house while you compete with the house in a game where you are chasing pennies in timeframes measured in seconds. And you wonder why returns disappeared for the past decade. My advice, find a new casino…fast.

So investors must now decide if they will choose to learn from history or be doomed to repeat it.

---The author, HUMMoney contributor Greg Lewin is currently a General Partner at TLF Capital, an investment management firm. He also is founder of Wall4Main, a financial information website dedicated to helping investors help themselves. During the past 26 years he has been a senior money manager or partner in Wall Street firms including Neuberger Berman, Charter Oak Partners and Sailfish Capital.