Saturday, August 23, 2014

Young Money: "Great capital allocators who ultimately weren't"

Excellent new post by Young Money:

"[T]he market environment is the main determinant of which investors achieve outsized returns. For example, Market Wizards profiles trend followers who achieved great success during the 1970s. The '70s were the perfect time for trend following-- the CRB doubled in less than 12 months on two separate occasions and experienced no major corrections, not even during 1973-74 recession. [...]

Investors should keep this in mind when they read books like The Outsiders that lionize successful capital allocators. The Outsiders suffers from hindsight bias. It profiles people who have been successful in a period of steadily rising asset prices and doesn't consider how their fortunes will change if the environment changes. It also excludes people who pursued similar strategies during the same period but failed for various reasons."
He and I are the only people I've ever seen express this notion - something that I called "investor genotypes in an investing ecosystem".


James said...

David Merkel has also written about the market as an environment:

Physics is the wrong model for financial markets and economics. The better models are ecological or biological, because people adapt to conditions that change. Perhaps we are predictable on average, but there is a wide variation in specific behaviors.

CP said...
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