Expertise, low volatility, budget chaos, Annie Duke and the next Warren Buffett - the best investing blogs and podcasts from the past week
Malcolm Gladwell, the American author, claimed in his 2008 book Outliers, that if you want to become a genuine expert at something then you need to spend 10,000 hours practising it first. Then greatness follows.
Gladwell’s inspiration for his 10,000 hour rule was a 1993 study of violinists. It found that practice really does make perfect, and that the very best musicians have spent an average 10,000 hours practising by the age of 20.
But time-poor budding musicians shouldn’t despair. A follow up study three years ago, asked a few more probing questions about all this and found that practice was only one, albeit important, factor on the path to expertise.
It turned out that the ‘best’ violinists didn’t practice as much as the ‘good’ violinists. The implication being that there’s more to it when it comes to greatness, such as the quality of the tuition and the talent and motivation of the pupil.
Violins aside, there’s been a growing unease in scientific circles in recent years about a ‘crisis’ of expertise and growing public suspicion of expert opinion.
You only need look at the scepticism of medical experts during the worst moments of the Covid pandemic to see that not everyone buys what they’re told, even when it comes to life and death. Challenging expert advice has become acceptable for politicians and the public alike.
Another example, much closer to home for this newsletter, is the proliferation online of non-professional stock analysis and due diligence. Anyone that’s frequented investing bulletin boards since they first emerged with the internet 20-plus years ago will know what I mean.
But more recently, ‘alternative expertise’ on shares and markets has proved that it’s capable of being much more powerful than just the kind of rampy, self-serving hocus-pocus that we’re all used to seeing on investing discussion boards.
The meme stock craze that took off in late 2020 was essentially driven by investment theses written by people who ordinarily had no background in professional investing. Yet their extensive due diligence posted on social media was enough to build movements strong enough to make life difficult for large hedge funds. Shares in US companies like GameStop, AMC Entertainment and BlackBerry garnered massive buying pressure that squeezed out institutional short sellers.
But in an environment where there’s already no shortage of data sources and professional analysis, why would these retail investors do this? And how?
This is the subject of a recent study by French researchers called Alternative Expertise in Financial Markets: An Analysis of Due Diligence Posts on WallStreetBets
WallStreetBets is the investing group on the social media platform Reddit that was the centre of gravity of the meme stock frenzy. It’s where the ‘alternative expertise’ on these shares was first posted.
In an exploration of 150 of the most popular posts, together with interviews with six of their authors, the researchers reached some predictable but nonetheless interesting conclusions.
First, these relatively young, internet-savvy investors sense a lack of fairness in the system that’s grounded in the financial crisis of 2008/09. They’re suspicious of investment banks, brokers, market makers and hedge funds.
So in many ways, these expert authors didn’t need to fulfil the criteria of being experts in the conventional sense. Rather their expertise was a social construct: the community accepted their contributions as valuable and ran with them.
Second, a lot of this online due diligence didn’t outright reject traditional expertise, rather it took it, adapted it and presented it more clearly for the community. And it did work. There were cases when this relatively small community on WallStreetBets leveraged expertise to get an advantage in the market.
More generally, this study concludes that it wouldn’t be surprising to see more of this type of thing in the future. The internet - particularly when it comes to the stock market - lends itself well to nurturing sources of alternative expertise. The challenge for regular investors, or course, is that in some ways it makes things harder to navigate. In an already noisy environment, the sources of expertise are growing.
Top posts from the past week
Capital Allocators podcast with Ted Seides - Annie Duke: The Power of Quitting
Annie Duke is a former professional poker player-turned-educator on all aspects of decision making. With a new book out called ‘Quit’ she’s doing the podcast rounds at the moment, and this conversation with Ted Seides is very good.
In some ways ‘Quit’ is an antidote to Angela Duckworth’s 2016 book called ‘Grit’. Conventionally, grit is seen as a virtue and quit as a vice, but Duke reframes things slightly by saying that they’re both born of the same decision. In other words, if you choose to stick with something, you are choosing not to quit it. And if you choose to quit something, you are choosing not to stick with it. The skill is in telling the difference between the two.
For an hour and 20 minutes here, they talk over some interesting examples and there’s a lot for investors to take from it - especially on the subject of loss aversion (which stops you from starting) and sure loss aversion (which stops you from stopping). Definitely worth a listen. There is another interview with Annie Duke by Meb Faber here: Annie Duke – Why Great Investors Are Great Quitters | #448
Excess Returns podcast - Low Volatility Investing and the Conservative Formula with Pim van Vliet
Pim van Vliet is head of conservative equities and head of quantitative equities at Netherlands-based asset manager, Robeco. Basically he’s spent his working life studying the fact that low volatility shares deliver similar or better returns than the market, which is a massive anomaly in standard models of asset pricing and returns. This observation goes completely against the idea that higher risk gets you high returns.
This is an unashamedly ‘quant’ conversation but there is a lot of really interesting stuff in it. Pim goes into how investors can measure risk (both standard deviation and beta) and how a low-vol strategy tends to pick up more defensive sectors. He explains a simple strategy that blends low-vol with both momentum and value to achieve stable, above-average returns. They also go on a broader exploration of factor investing and how well different factors work on both the long and the short side.
Frederik Gieschen, Neckar's Minds and Markets - Thinking About the Next Warren Buffett
Write an investing story with the words “Warren Buffett” in the headline (like this newsletter) and you can more or less guarantee clicks (well, almost). But what pretty much all the analysis of Buffett and his long investing journey tends to show is that endeavouring to replicate him and his success is completely impossible (for all sorts of reasons).
That’s not necessarily saying there won’t be others who come along and generate incredible wealth from savvy investing. Just that they won’t do it by copying Buffett. And that’s what this article by Frederik Gieschen is all about. It’s a nice deconstruction of how the investing world tends to think about Buffett, his ubiquitous influence and why he’s held in such high esteem. It’s a good read and provokes some thoughts on what the genuinely important lessons from Buffett really are.
Q3 portfolio updates -
Monevator - The Slow and Steady passive portfolio update: Q3 2022
Maynard Paton - Q3 2022: Portfolio Winners As GBP Slides Towards USD Parity
Compound Income - September / Q3 Downdate
Share Knowledge - Squeaky Bum Time
It’s been a tough year so far, so these Q3 portfolio updates must have been agonising to write at times. I know my own portfolio is experiencing something very similar. For passive investing fans, Monevator’s Slow and Steady portfolio is definitely worth a read - especially for views on the bond market mayhem we’ve been living through. For active stock pickers, updates from Maynard, Jamie and Simon (all three have a quality/growth focus) are excellent.
Money podcast with David Buik and Michael Wilson - plus Paul Hill from Vox Markets - Chancellor Kwasi Kwarteng's mini-budget U-turn
There’s been a lot of analysis of Kwasi Kwarteng’s ‘mini’ Budget but it feels like a lot of it hasn’t really got into the details of what went on with the subsequent liquidity crisis in the pensions market. This podcast was a new one on me, but David Buik and Michael Wilson had Paul Hill of Vox Markets on this week and he does a really great job of explaining some of the moving parts. The upshot is that we seem to have accidentally stumbled on yet another flaw in the way some very important financial products (people’s pensions) are being managed. It really is beyond belief that nobody seems to be on top of this kind of thing. That aside, Paul is great value in this conversation on a whole range of issues.
Have a great weekend,
Ben
PS. Catch up below with the best of the rest from the past week…
Thinking & Strategy (Blogs)
Global Factor Performance: October 2022
Alpha Architect
Why I am invested in active funds, but I’ve put my daughter’s savings in a tracker
Trustnet
The internet is (not just) for porn
Klement on Investing
Eat The Rich or die trying (a review, of sorts)
Monevator
Three Things I Think I Think – Cramer, The Economics of Home Runs & The Bear Market
Pragmatic Capitalism
Expectations (Five Short Stories)
Morgan Housel
Could We See Another Lost Decade in the U.S. Stock Market?
A Wealth of Common Sense
What the Money is For
Of Dollars And Data
Legends of Market History: Tokushichi Nomura II
Investor Amnesia
Legends of Market History: Tokushichi Nomura II
Investor Amnesia
Thinking & Strategy (Podcasts)
Wall Street Legend Jim O’Shaughnessy is Back On ‘Panic With Friends’ – A Calm Voice in Turbulent Times
Howard Lindzon
TIP480: Why Microcaps Have The Best YTD Performance w/ Ian Cassel
We Study Billionaires - The Investor’s Podcast Network
Liz Wallenstein + Dr Michael Donnino — The Mind-Body Connection (EP.126)
Infinite Loops
S4 Ep.2 The Future of Energy with Andy Bradley
Investment Uncut
Scott Wilson - Non-Traditional Endowment Investing - [Invest Like the Best, EP.297]
Invest Like the Best with Patrick O'Shaughnessy
#148 Kenneth Stanley: Set The Right Objectives
The Knowledge Project with Shane Parrish
Jake Taylor Joins Us to Discuss Value Investing and the Importance of Journaling
The Investing for Beginners Podcast
Securities & Markets (Blogs)
Small Caps Live Weekly Summary
Small Caps Life
Should YOU steer clear of emerging markets or is it time to buy?
Investing | Mail Online
All 147 Dividend Champions In October 2022 | Updated Daily
Sure Dividend
How has trouble in the gilt market affected UK shares?
Investing | Mail Online
October 2022 Stock Considerations
DivHut
Securities & Markets (Podcasts)
Animal Spirits: Long-Term Bullish
The Irrelevant Investor
SThree (STEM) – CEO & CFO interview – 6 Oct 2022
Quality Small Caps
Learning from the 1970s, and why stocks, the pound and mortgage and savings rates are going up
AJ Bell Money & Markets
#136 – Michael Venuto - Redefining ESG, Thematic Funds, & the Future of the ETF Industry
Opto Sessions
Noelle Cazalis: “I would expect to see a huge amount of volatility”
Investors' Chronicle
Intuit: An Operating System for Small Businesses - [Business Breakdowns, EP. 77]
Business Breakdowns
E104 - AG Barr, Boohoo, Next, Kingfisher, Saga & Nike
The Investor Way
Judges Scientific (JDG) interim results presentation – September 2022
PIWORLD
John Mills: why a weak pound is good for the UK
The MoneyWeek Podcast
Weekly Investment Trust Podcast with Jonathan Davis (01 Oct 2022)
Money Makers
Small Caps Podcast with Paul Scott – Episode 14
Quality Small Caps