Ben Graham, superbubbles, ESG and AI chatbot analysts
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I’ve been re-reading Robert Cialdini’s excellent book on the power of persuasion, called Influence.
It’s one of those books where it feels like there is so much to learn that you could find something new every time you read it. He compresses so many observations and techniques into his paragraphs. If your mind wanders for a moment there’s a risk that you might miss something life-changing.
Anyway, the first of his weapons of influence is reciprocation. Put simply, this hangs on the deeply ingrained human instinct to return favours. Or to put that another way, the hard-wired terror of being perceived to be someone who receives but doesn’t give (this stuff is even in the Bible).
Cialdini’s work is really about how acts like reciprocation can be used to make people behave in certain ways (usually by parting them with money). So you could read this book and feel a heightened sense of scepticism about the world around you.
But it works both ways. When you find someone who doesn’t feel the need to play these mind games, you might have found someone quite special. I was reading an article this week by Frederik Gieschen, about Ben Graham, the father of value investing, and that’s what occurred to me about him.
Ben Graham basically forged a strategy in the aftermath of the US depression in the 1920s that focused on buying undervalued shares. And because of the state of the market at that time, there were loads of those kinds of shares. But over time, they went away, as you’d expect.
Warren Buffett, who was a student of Graham, stuck with the value strategy for some time. But Charlie Munger, Buffett’s business partner and ever the pragmatist, saw the strategy for what it was: short term.
Graham actually went on to make a great deal of his money in just one stock: Geico, which wasn’t one of these beaten up value stocks. Frederick quotes Munger as saying: “...if you actually look at the great man’s own life, you’ll see that what he taught wasn’t the way he got rich himself.”
It turns out the reason why Graham continued to promote his value approach was that just about anyone could do it. Buying underpriced shares with a margin of safety was viable for anyone with access to basic data.
What he really cared about was being able to help people. Even to the extent that he would limit his own investment techniques if he thought they weren’t replicable by a reader of his book.
Later in life, Graham moved on from investing. He felt that he’d made enough money and there were other things that interested him. Like opera and literature.
According to Frederik, Buffett apparently wrote in Graham’s obituary that he had “an absolutely open-ended, no-scores-kept generosity of ideas, time and spirit.”
It was that “no-scores-kept generosity” that made me think that Graham was one of those people that would never have dreamed of using reciprocity to his own advantage. And for someone who gave so much to the art and science of investing, that’s pretty remarkable.
Frederick’s article is here: Enough: The Forgotten Lesson of Ben Graham's Life
Jeremy Grantham on superbubbles and ESG
I mention him occasionally, but Jeremy Grantham really is worth a listen whenever he makes an appearance.
He’s the boss and chief strategist of US asset manager GMO, and a real legend when it comes to market psychology. Bubbly conditions in the States in recent years have been the perfect setting for him to raise the alarm over the prospect of ‘superbubbles’ emerging in places.
Even after last year’s sell-off he’s predicting markets to finish flat or down in 2023 and to continue this leg down well into next year.
One of the reasons why this guy is worth paying attention to is the sense that behind the facade of the respectable elder statesman (and to be fair, he definitely is one of those) is a contrarian rebel who is more than happy to call out BS wherever he sees it. And he sees it a lot.
Despite signs of optimism earlier this year, Grantham is clear that there are inflationary pressures everywhere. Pressure on resources, war, de-globalisation and the remnants of Covid are all making life hard for central banks in taming inflation. And on the subject of the Federal Reserve, he puts the blame for much of what has gone wrong at their door.
But as fun as it is to hear his bearish views - bearing in mind that he is very much a value investor - he’s also got some robust thoughts on ESG investing, plus some surprisingly optimistic takes.
On ESG (investing based on good corporate behaviour on issues like the environment, society and governance) he’s predictably cynical. In particular, he believes that capitalism simply isn’t set up to do anything other than focus purely on returns:
“Capitalism cannot act out of the goodness of its heart to forego profit in the interest of the collective grandchildren.”
And as an industry, he believes asset management is essentially not interested in anything other than looking good - and being seen to be civic minded for the lowest possible price.
But while ESG investing gets short shrift, Grantham does sound notes of both caution and enthusiasm for what lies ahead. In short, climate change will likely be existential but capitalism will solve the green energy question:
“If we make it through climate change, and I use the word “if” deliberately… it will not be because we are altruistic, it’s because it will be good for business. It’s because the inventions of wind, solar and storage are simply going to be much cheaper than burning fossil fuels…
“Technology improvements are merciless, they grind ahead… We will have plenty of cheap green energy before this is over, if we can just hold global society together.”
It sounds like GMO are working on a new note on these issues. In the meantime, here’s where to find Bloomberg’s What Goes Up podcast - Jeremy Grantham's Market Meat-Grinder
ChatGPT and investment strategies: garbage in, garbage out
As a writer, you could make the case that I'm on the pile marked ‘screwed’ when it comes to occupations that are going to get owned by Artificial Intelligence (AI).
I like to think that as long as I’m on the side of original thought and new ideas, I’ll be okay. Then I remember the old biblical idiom “there’s nothing new under the sun” and start panicking again.
But what about finance and investing? Do AI chatbots like ChatGPT mark the beginning of the end for quants? Well, not so fast.
In The Road Ahead: Investment Tips From ChatGPT, Henry Neville at hedge fund giant Man, puts the AI to the test with a series of requests.
In particular he asks for guidance on a good metric to use for each of three main factors: valuation, growth and sentiment covering the US market.
Would ChatGPT come up with anything useful? And if it did, would the metrics help generate outperformance?
It was an understandably simple test. ChatGPT might be impressive, but coming up with complex hedge fund strategies based on many moving parts might have been a bit much.
Here are the metrics it came up with:
Valuation: Forward P/E ratio
Growth: Nonfarm payrolls
Sentiment: It chose two: implied volatility (VIX) and equity fund flows
Backtesting the data, Henry found that none of the metrics on its own was able to beat the market. They also proved to be weak in combination - reinforcing the age-old financial saying: ‘garbage in, garbage out’.
But therein was a big lesson from this exercise. ChatGPT answered the questions it was asked. But as Henry points out, there are rarely any clean answers despite the fact that many go looking for them. Investing is much more about shades of grey.
That said, it seems clear that AI will likely play an incredibly important role in investment management as the technology evolves. For now, analyst jobs are safe. But I’m still not sure about writers.
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