Keeping in yesterday’s theme of commencement speeches, readers may also find Michael Lewis’s speech worthwhile.
Lewis’s life experiences and research has led him to believe that luck plays a huge role in determining one’s success (or lack of success). Students graduating from Princeton are by most people’s standards extremely lucky. These individuals may feel a sense of entitlement, but they should not forget the role luck has had in their current success:
A few years ago, just a few blocks from my home, a pair of researchers in the Cal psychology department staged an experiment. They began by grabbing students, as lab rats. Then they broke the students into teams, segregated by sex. Three men, or three women, per team. Then they put these teams of three into a room, and arbitrarily assigned one of the three to act as leader. Then they gave them some complicated moral problem to solve: say what should be done about academic cheating, or how to regulate drinking on campus.
Exactly 30 minutes into the problem-solving the researchers interrupted each group. They entered the room bearing a plate of cookies. Four cookies. The team consisted of three people, but there were these four cookies. Every team member obviously got one cookie, but that left a fourth cookie, just sitting there. It should have been awkward. But it wasn’t. With incredible consistency the person arbitrarily appointed leader of the group grabbed the fourth cookie, and ate it. Not only ate it, but ate it with gusto: lips smacking, mouth open, drool at the corners of their mouths. In the end all that was left of the extra cookie were crumbs on the leader’s shirt.
This leader had performed no special task. He had no special virtue. He’d been chosen at random, 30 minutes earlier. His status was nothing but luck. But it still left him with the sense that the cookie should be his.
This experiment helps to explain Wall Street bonuses and CEO pay, and I’m sure lots of other human behavior. But it also is relevant to new graduates of Princeton University. In a general sort of way you have been appointed the leader of the group. Your appointment may not be entirely arbitrary. But you must sense its arbitrary aspect: you are the lucky few. Lucky in your parents, lucky in your country, lucky that a place like Princeton exists that can take in lucky people, introduce them to other lucky people, and increase their chances of becoming even luckier. Lucky that you live in the richest society the world has ever seen, in a time when no one actually expects you to sacrifice your interests to anything.
All of you have been faced with the extra cookie. All of you will be faced with many more of them. In time you will find it easy to assume that you deserve the extra cookie. For all I know, you may. But you’ll be happier, and the world will be better off, if you at least pretend that you don’t.
Never forget: In the nation’s service. In the service of all nations.
Michael Burry is a former hedge fund manager that predicted the subprime mortgage bubble. Below is his commencement speech to the graduating class of UCLA’s economics department.
Michael Burry presents a glimpse of his investment philosophy: always asking questions. He’s a veracious seeker of knowledge which helps him challenge the status quo and recognize when the masses are wrong. Regarding traditional views of modern portfolio theory and finance, he states, “As it turns out, information is not perfect, volatility does not define risk, markets are not efficient, the individual is adaptable.”
We all know humans suffer from cognitive biases that cloud our judgment and how we perceive the world. We also know that smarter people tend to have meta-cognition, or the ability to think about what we are thinking. Logically, we would expect that better thinkers would be more aware of when they are subject to these cognitive biases and be less susceptible to them.
One researcher decided to test this hypothesis:
The results were quite disturbing. For one thing, self-awareness was not particularly useful: as the scientists note, “people who were aware of their own biases were not better able to overcome them.” This finding wouldn’t surprise Kahneman, who admits in “Thinking, Fast and Slow” that his decades of groundbreaking research have failed to significantly improve his own mental performance. “My intuitive thinking is just as prone to overconfidence, extreme predictions, and the planning fallacy”—a tendency to underestimate how long it will take to complete a task—“as it was before I made a study of these issues,” he writes.
Perhaps our most dangerous bias is that we naturally assume that everyone else is more susceptible to thinking errors, a tendency known as the “bias blind spot.” This “meta-bias” is rooted in our ability to spot systematic mistakes in the decisions of others—we excel at noticing the flaws of friends—and inability to spot those same mistakes in ourselves. Although the bias blind spot itself isn’t a new concept, West’s latest paper demonstrates that it applies to every single bias under consideration, from anchoring to so-called “framing effects.” In each instance, we readily forgive our own minds but look harshly upon the minds of other people.
And here’s the upsetting punch line: intelligence seems to make things worse. The scientists gave the students four measures of “cognitive sophistication.” As they report in the paper, all four of the measures showed positive correlations, “indicating that more cognitively sophisticated participants showed larger bias blind spots.” This trend held for many of the specific biases, indicating that smarter people (at least as measured by S.A.T. scores) and those more likely to engage in deliberation were slightly more vulnerable to common mental mistakes. Education also isn’t a savior; as Kahneman and Shane Frederick first noted many years ago, more than fifty per cent of students at Harvard, Princeton, and M.I.T. gave the incorrect answer to the bat-and-ball question.
Properly measured, the average actively managed dollar must underperform the average passively managed dollar, net of costs. Empirical analyses that appear to refute this principle are guilty of improper measurement.
Read the full article here. It was written in 1991 but is still relevant today.
My portfolio year-to-date returns as of the end of the second quarter are +2.84% for my individual account and +10.17% for my Roth IRA compared to +1.63% for the S&P 500.
I accidentally skipped doing this for the previous quarter and have been neglecting this blog in general for the past few months. At some point during the past few months, I decided to focus intensely on studying for Level 2 of the CFA exam which I wrote last weekend. Everything else, including this blog and managing my portfolio was secondary for quite some time. But now I can return to writing in my pathetic blog.
The orange line in the graph above represents my Roth IRA. The green line represents my individual account. Readers may not know that my individual account has essentially been passively managed for the entire existence of this pathetic blog and probably longer than that. In fact, I can’t remember the last time I made a trade in that account. The reason is that I still have a considerable amount of excess cash in my Roth IRA which I need to commit. Any trades (especially of a short-term nature) should first be made in my Roth IRA to take advantage of its tax benefits.
Overall, I’m still happy with my Roth IRA’s performance. I had a short position through TZA (a 3x levered short ETF that uses the Russell 2000 as its benchmark) for most of the year which I sold recently for a short profit. Unfortunately, I sold much too early, so I’ve been exposed to the recent market decline.
Given the passive nature of my individual account, I’m satisfied with its performance as well.
I normally don’t like talking about my positions publicly because I’m scared that announcing any positions will negatively affect my trading performance. So for now, I’ll only be able to discuss my trades retrospectively. Maybe I’ll change my stance on this position in the future. I’m willing to discuss my latest thoughts in private though.
Curated Alpha is a blog focused on intelligent and insightful discussion on economics, trading, markets, and other topics of intellectual interest that are outside the traditional financial press. This blog contains a curated collection of articles and content on these topics as well as the author’s own commentary and analysis. Learn more.