Gareth Howlett: Forgo the brilliant mutt myth for some simple dog sense
I READ a brilliant story the other day about a dog with a talent for investment. His owner, who was an avid watcher of stock market news on the financial channels, noticed that the dog would bark whenever certain companies were mentioned.
Listening more closely, he found that some names got one bark while others got two. He then started to follow the prices of those stocks and, to his astonishment, all the two-bark stocks outperformed by 20 per cent or more, while the one-bark stocks underperformed by a similar margin.
On the strength of such a track record, this canine genius could name his price at any investment firm in the world, or he could set up his own highly lucrative hedge fund partnership. The markets would hang upon his every woof, and he would hold the fate of mighty commercial empires in his paws.
Investors across the world would pour countless billions into his flagship Dog Fund and its devastatingly effective strategy.
Enterprising outsiders would try to cash in on the craze by publishing books and articles claiming to reveal the secrets of the sagacious hound. How to Invest Like a Dog titles would dominate the business books section, sprinkled with cheesy imagery of the “sniffing out bargains” variety.
The belief that there is a short cut to success is deeply rooted in human nature, and this fanciful story of the investing dog has many echoes in real life.
Whether you want to lose weight or learn French, there is someone to tell you it can be done without the tedium of diet, exercise, and irregular verbs.
The other variant is the belief that success depends on mastering a secret technique, a magic key or a silver bullet, known only to a few, but which a few lucky outsiders such as yourself can buy for the price of a book or a magazine, or an investors’ seminar in a suburban hotel.
This view of investment is a bit like the Hollywood version of science, a dramatic tale of lone genius startling the world with brilliant inventions conjured out of thin air. In reality, both activities are much more incremental and collaborative.
All honour to Professor Higgs for speculating about the boson; but it has taken nearly 50 years of effort by thousands of others, and huge amounts of money, to prove him right. James Watt, Thomas Edison and John Logie Baird get the glory for the steam engine, the lightbulb and the television, but they and their teams were the first across the line in races with many competitors.
So it is in my world, with a few flashes of genius against a background of steady, painstaking routine work by obscure armies, poring over financial reports and other arcane data, nudging and tweaking as they edge forward. Instead of complete triumph or total disaster, we move between modest success and minor setback, learning a little more from both. I once read that ten thousand hours of practice is what it takes to be a genius. It’s the equivalent of just under five years of full-time work, which seems right to get to a basic level of competence.
So far, we’ve looked mostly at “inputs”, what investment managers actually do. However, what the client is interested in is the “output”, how does all this relate to the performance you can expect from your investments?
Here again a doggy comparison will help us. If you train your dog thoroughly you will be able to make it do basic things like sitting on command or walking to heel. What you won’t be able to do is teach it to play the piano. Similarly, an investment manager can put a portfolio together which over a period of several years has a good chance of giving you a decent return. What he can’t do is recreate the lost bull market conditions of the 1980s and 1990s, when the markets seemed to move steadily upwards in an effortless and virtually uninterrupted curve.
So, no miraculous dogs, no short cuts, no guaranteed get-rich-quick schemes, just diligent efforts and moderate expectations.
l Gareth Howlett is fund manager director at Brooks Macdonald Asset Management
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