Martin Pelletier: There is often a positive correlation between the size of one’s ego and the amount of assets one manages
Traders working on the floor of the New York Stock Exchange. Photo by Michael M. Santiago/Getty Images files I just finished reading The Almanack of Naval Ravikant: A Guide to Wealth and Happiness, and it was an excellent amalgamation of years of advice offered by the Indian-American entrepreneur, investor, and co-founder, chairman and former chief executive of startup-funding website AngelList.
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I share Ravikant’s approach to new books by first skimming through them, finding the interesting sections and then re-reading them. A few of his mantras really struck close to home, especially around philosophies and approaches when tackling challenges, which can easily be applied to investing.
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Decision making and leverage “Decision making is everything. In fact, someone who makes decisions right 80 per cent of the time instead of 70 per cent of the time will be valued and compensated in the market hundreds of times more. If I manage $1 billion and I’m right 10 per cent more often than somebody else, my decision making creates $100-million worth of value on a judgment call.”
Understanding the fundamental nature of this is imperative for a money manager, especially considering the impact it can have as one grows and manages more capital. Unfortunately, there is often a positive correlation between the size of one’s ego and the amount of assets one manages. You routinely see this result in an inverse relationship between performance and the size of an asset manager as they eventually lose touch with what got them to where they are.
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Article content Being able to adapt and learn from your mistakes means putting your ego aside and trying to undertake an honest self-appraisal of your strengths and weaknesses. This is a great first step to invoke positive change and improve the odds of being right while minimizing the consequences of being wrong.
Clearing your mind in order to see the truth “The more desire I have for something to work out a certain way, the less likely I am to see the truth.”
Having an open or what Ravikant calls a “clear” mind can be a challenging thing to do, because we have years upon years of preconceived notions of the way things are and then we try to reshape the external reality to fit this internal view. This leads to poor decision making because we fail to see the situation clearly as our emotional desire for a certain outcome overrules logic, objectivity and the truth.
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Article content This often results in recency bias, or being overconfident that what has happened in the recent past will play out again in exactly the same way. Consequently, we willfully ignore structural shifts and fundamental changes in the market, which results in missed opportunities.
This happened following the tech crash in 2000, and the quantitative-easing/low-rate policy following the financial crisis in 2008. One could even argue that it is occurring right now following the economic shutdown and COVD-19 crisis in 2020.
The dangers of conformity and zero-sum thinking “A contrarian isn’t one who always objects — that’s a conformist of a different sort. A contrarian reasons independently from the ground up and resists pressure to conform.”
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Article content It is deep within our psyche to not deviate from the crowd. Investment managers stay the course all the time, resulting in highly correlated market returns and benchmark tracking. This is because zero-sum investing takes root and the winners, or top performers, become losers given enough time, and the losers become winners, with everyone ultimately mean reverting back to the passive benchmark.
A perfect example of this is how value managers outperformed growth from 2000 to 2009, growth outperformed value from 2009 to 2021, and now value has once again been beating growth since 2021. It’s all one giant game of musical chairs.
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People are inherently return chasers, so zero-sum investing drives investment managers to copy each other in order to capture this capital and, as a result, everything becomes out of balance.
Taking a goals-based approach independent of everyone else is a great way to avoid this outcome. This means setting your own return targets (in context of the current market environment) to achieve a financial objective and then mitigating the risk as much as possible. This will help smooth out the consistency and predictability of a portfolio’s performance.
Self-awareness is the key to this, or as Ravikant so eloquently puts it, “Life is really a single-player game. It’s all going on in your head. Whatever you think, you believe, will very much shape your reality. Both from what risks you take and what actions you perform, but also just everyday experiences of reality.”
Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc, operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning.
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