Cult of the Guru and Independent Thought

You wont believe who said this….but more on that later.

Depression Not Recession

Depression Not Recession

To say that I read a lot of outside research from the sell side, buy side, independent shops, blogs, tweets, and whatever else I can find would be an understatement. I read about one actual book a week along with a gazillion pages and articles of research. I basically get paid to think, read, look at and model data, and……think some more.

That last part is of course key because it is what brings together everything else I do. Sadly I have found that far too many people, and in this case investors/traders, fail to do this. Too many people find a guru or two or three and then attempt to just follow what the guru does, or at least what the investor thinks the guru does. If you actually get to sit in the office with Buffett or Soros or someone similar day after day then maybe this strategy would work–although it probably won’t–but barring that it definitely will not.

We, and by we I hope I mean me and anyone reading this, study great investors to learn the how of what they do and not just what they are doing. I scour 13F’s as much as the next guy…..OK maybe a lot more, but the point remains that if you are not also thinking about both what the famed investor is thinking and whether any of this is applicable to your portfolio. then it is all for naught.

For example look at Warren B. Most people who claim to be following his methodology buy and hold stocks and claim that they are never going to sell. While this may or may not be a successful strategy–for most it ends up being mediocre–it is NOT where Warren B has actually generated most of his outperformance. It is also NOT what he has said to do.

We could go on for a few days on this topic, but the short version is that Warren B says that the ideal stock–sorry, in B terms, it is a company–is one that he never has to sell. Living in reality however WB has regularly bought and sold stocks. In addition he has done more than his share of workouts–in Graham/Dodd speak a workout is what most now refer to as Merger Arbitrage–not exactly a buy and hold forever deal. On top of all this he trades derivatives in massive size, has traded commodities more than once, and finally, at least for now, he gets investment deals that no regular person has a chance of getting into. How many of you did Goldman call up in the 2008 crisis? I was sitting by my phone, but it never rang.

All of this is not to rail on an aspiring Baby Buffett, in fact everyone should read all the Berkshire letters, the Buffett Partnership letters (his Hedge Fund), “How to Trade Like Warren B” by Altucher, “Buffett” by Lowenstein, and all of the academic studies and other books written on the guy. You will learn many things but two stand out. 1-Warren B is a great businessman but a lot of your beliefs about him are probably wrong and 2-You should now have learned enough to adapt parts of his philosophy to your own personality and become your own investor. Notice that I did not say “you can now follow Warren B’s every word and outperform.” The reality is that you can’t. You have to learn from but not worship the great investors.

In the end after you read or listen to anything from anyone but especially supposed “experts” you need to think for yourself.  Failing to do so not only guarantees that over time you underperform but likely makes you drastically underperform.

I love writing this letter and putting my thoughts down on paper. I run a model portfolio to keep me accountable for my official “trade ideas,” but I would hope that anyone reading it would think, read, think some more, and then make a decision about whether what I am saying makes sense to them as well as their portfolios before possibly doing anything.

Why am I all anti-guru all of the sudden? First of all, I have always been anti-guru worship. Second of all, I have had 4 conversations in the past few days regarding the comments of one of my guru heroes. Being unsolicited conversations I thought now a good time to explain my anti-hero worship and blind following.

Professionally my two gurus are undoubtedly Stanley Druckenmiller and Ray Dalio. They are amazing at what they do based on any measure. They make money in most up and down markets, have made more than just about anyone, are both macro, both wicked smart, etc. etc. Basically my goal is to emulate them……but in my own way.

If you are familiar with them, you have already recognized that while they are both macro, they go about things very differently and seem to have different strengths. Where Dalio is king of detailed economic research, Druckenmiller is king of risk taking and risk management.

Both are very much worth studying but guess what?…….They have both been wrong before and will be wrong again.  This is why it is critical that you think for yourself. Everyone, even the best, are wrong on a regular basis.

All this brings us to the next point: A few days ago Dalio came out saying that he expects more QE sooner rather than later. He then clarified what the news reported by writing on LinkedIn his views. Here is the link and it is worth reading for yourself.

The Dangerous Long Bias and the End of the Supercycle

He could be right, and he brings a well thought out case for why he thinks that more QE is on the way. However, I have read it a few times now and disagree with him. I went into why I disagree in the letter this week but let me show you how a guru cannot only be wrong but drastically so.

In my visits to the library in order to read old Barrons (it is both very enjoyable and very enlightening) I came across this article a few months ago (see graphic below). It was published October 12th 1992 by a young Ray Dalio who was then managing $1.5 billion instead of the $150+ billion he is now managing. If you look at the title and then at the date you might be literally laughing out loud. The 1990’s were a lot of things but a depression is not one of them.

Ray Dalio Depression Not Recession

Ray Dalio Depression Not Recession-Barrons October 12, 1992

In the article Dalio goes into why he thought that we were in the early stages of a new depression. Among other things he pointed to was that the Fed had already drastically cut rates and yet the overall economy remained weak.

As you can see in the chart below of the 10-2 yield spread, this piece, and Dalio’s view, came out right at peak Fed ineffectiveness. What I mean by this is basically right around the time that this piece was published, the Fed stimulus started to work, and we left the recession which means that not only was he wrong but he was wrong at exactly the wrong time.

10-2 Yield Spread 1988-1995

10-2 Treasury Yield Spread 1988-1995

As we now know the economy not only did not go into a depression but was actually in the middle of the best 20 year period in the US stock market history. Of course Dalio being a master of the craft must have figured this out since as you can see in the performance table below he proceeded to make a little bit in 1992 and kill it in 1993 (see table in the graphic below).

Bridgewater Pure Alpha Fund Returns

Bridgewater Pure Alpha Fund Returns-Source ValueWalk

Hopefully you see the value in independent thought. Here is a true master, or wizard if you prefer, calling for a depression in something as public as Barrons. He was not only wrong but drastically wrong. If you had blindly followed it, you would have missed some of the best years in market history.

Blindly following a guru, even a guru as good as Dalio, is a sure way to the poor house.  Please think for yourself in all things. Read research (shameless plug: this letter is a great place to find some) but in the end make sure that you agree with any trade idea you find here or anywhere else and that it fits with your current portfolio. Doing anything else is just a way to lose money in the long term.

As a not so side note you should always be thinking things through and making your own decisions. Doing anything else deprives you of learning…..and that sounds like something out of “Principles” by Dalio.

Happy Trading,

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