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Hubris is the Greatest Challenge

Updated: May 17, 2022

I am not exactly sure how I have ended up as a chief investment officer. Looking forward at the investment landscape, I generally only see potential for things to go wrong. Looking back at my career, my investment mistakes dominate my memories. Many, perhaps even most of them, were a long time ago, but they still haunt me both in my waking hours and in my sleep. I’m a worrier - managing people’s hard-earned savings is an austere and great responsibility, second only to undertaking.

"Managing people’s hard-earned savings is an austere and great responsibility"

Furthermore, my career progression has hardly been conventional. Although I spent long stints at two big firms, I also spent a number of years in between on an Indonesian island trying to build a food business. How can such neuroticism and wanderlust constitute suitable CIO material?

When the editor and I were discussing this opportunity to pen The Last Word column, he recalled a presentation at which a well-known and respected fund manager was asked to name what he thought was the biggest challenge investors faced. Inflation? Growth? Valuations? Politics? “Hubris”, came the simple and immediate response. I could not agree more.

There is so much uncertainty in the world of investing that it is foolish to think you have it sussed. In ancient Rome, a slave would whisper repeatedly, “Remember, you are mortal”, in the ears of victorious generals returning to Rome and its adoring crowds. A few years of good investment performance or a run of good stock picks can make one feel invincible, while the reality may well be that one was just lucky. Probably best to assume you were lucky. There is no downside to doing this and it does not cost anything - what a great investment! It is possible that there was skill involved, but less let this inflate your portfolio, not your head.

The uncertainty in investing manifests itself in the largely random movement of stock prices. It can, however, also relate to something equally fundamental. No one can agree whether investing is an art or a science. Some say it is one, some the other, some both. Some even say it is neither! I challenge you to think of another pursuit where there is such uncertainty.

For what it is worth, I think investing is ‘art’, not ‘science’. Science involves broad agreement about the behaviour of, say, numbers or planets or elementary particles or rocks or plants or people. Successful investing, on the other hand, necessitates disagreement. For me to give myself a chance of beating my competitors and thus the market, the last thing I should do is agree with them. I seek out where they are huddled together, such as government bond positioning currently and do precisely the opposite.

This, however, requires one to be completely comfortable being apart from the crowd. This is hard as it is human nature to want to conform and be part of a group. There is a famous saying in Japanese, Deru kugi wa utareru, which means ‘A protruding nail gets hammered down’ - a stern warning to nonconformists. You will also find that many animals operate in groups too, while the dissidents perish.

I think I have my father to thank for any humility I might have and my school boarding house for turning me into something of a rebel. Boarding schools generally are horrific institutions - it is, I believe, completely wrong for children to be apart from their parents - but they can also nurture traits that are useful in certain professions. I learned at the age of 13 to despise my lazy and nasty boarding masters.

Ever since, I have had what I think is a healthy disdain for authority, whether the authority that is embedded in the crowd or otherwise. At other times I have completely accepted it - my prison record, or rather lack of it, speaks for itself!

Perhaps it is this unusual and somewhat contradictory combination that has made me feel lucky in my chosen profession.

Published in What Investment

The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.

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