Investment Luminaries and Their Insights

The CFA Institute through its research foundation recently published a 130+ page brief with insights from 25 years of Vertin Award recipients.

These luminaries in the investment field come from a range of backgrounds, from Nobel Prize winners, distinguished professors, billionaire hedge fund managers, editors of prestigious academic journals, and authors of some of the most popular investment books ever published. 

Although their backgrounds vary widely, they have one thing in common: they have all made significant lifetime contributions in the field of finance. 

What is the Vertin Award?

"The Vertin Award is given to intellectual leaders in the investment industry whose ideas are not only compelling in theory but meaningful in practice. The award winners are indeed exemplars of the CFA Institute mission to set the highest standards of ethics, education, and professional excellence for the ultimate benefit of society. It is fitting that this award is named for Jim Vertin, a dedicated volunteer and professional who recognized the potential to create a multiplier effect on the industry by connecting researchers with practitioners." - CFA Institute 

"None of us is as smart as all of us,” read the anonymous quote on the wall of James Vertin’s office.
 
With that quote in mind, we can learn a lot from the collective wisdom of these Vertin winners. Below are a few of the recipient's and their notable comments. 

William Sharpe
Noble Prize winner​
Professor Emeritus Stanford University

• If I had to summarize what I learned about investments in one verb, it would be "diversify."

Marty Leibowitz
CIO, TIAA and author of several seminal books and articles.

• Be skeptical of yourself, especially when you think you know something the market doesn’t.
• Some of our best research starts with an often-painful realization that we missed something in our prior work.
• Models are only approximations of a complicated, surprise-filled reality.
• Even if you could correctly anticipate some future event, you might be wrong about the market’s response.
• The Federal Reserve is not always right—but it is very big.
• Some forms of growth are pushed by investment whereas others are pulled forward by future opportunities. It is better to be pulled than pushed!

 
Andrew W. Lo
Professor MIT

• Markets can stay irrational longer than you can stay solvent.
• In the long run, we’re all dead, but make sure the short run doesn’t kill you first.
• It’s amazing how much more you can accomplish if it doesn’t matter who gets the credit.
• When John Maynard Keynes was criticized as a flip-flopper for changing his views on the gold standard, he replied, “When the facts change, sir, I change my mind; what do you do?” The same can be said for investing. When the economic environment changes, we need to change our investment approach. And when change occurs rapidly, the speed with which we adapt needs to keep pace.

 
Clifford S. Asness
President, AQR Management

• Finding an investment strategy you believe in for the long term turned out to be the easy part. Sticking with it through its ups and downs turned out to be the hard (but doable) part.
• What to do? Well, work on finding an investment strategy you believe in. Don’t be fooled by valuation changes (hey, this thing has gotten much more expensive or cheap, and that will go on forever!). Be willing to be different but not so different you can’t survive (and, as discussed, survival is much harder than you think).
• Be very cynical.
• Be very worried that what you believe in might be the result of data mining, or period specific, or subject to a host of other pitfalls.
• Try hard to prove yourself wrong. Do it all the time, but recognize you’ll be doing it most ardently when times are very tough, as that’s human nature. Then, if you don’t succeed at proving yourself wrong, but rather remain convinced you’re right, stick with what you believe in like grim death. It will work out.

 
Campbell R. Harvey
Professor Duke University

• In my 35 years as an academic, as an adviser to many asset-management companies, and as an editor of one of the top academic journals in finance, I now realize the crucial importance of the role incentives play in the production of research.
• To obtain positive outcomes, researchers often resort to extensive data mining. In principle nothing is wrong with data mining if it is done in a highly disciplined way, but it is often not.
• Investors can take a number of steps to mitigate the problem. First, be skeptical of both academic and practitioner research. Often a predetermined agenda or incentives make the results seem stronger than they are. Second, take the research culture into account. For example, when presented with a new strategy, ask if the company keeps a record of all variables that were tried. Third, try to quantify the costs of different mistakes (selecting a bad manager versus missing a good manager). Fourth, make sure the strategy has a solid economic foundation. Also, beware of ex post theorizing (after discovering the result, a story is concocted). Fifth, strategically ask questions such as, “Did you try X?” If the answer is “Yes, and it does not work,” and X is not reported, this is a red flag. On seeing one cockroach, you can safely assume a dozen are behind the wall.

Roger Clark
President, Ensign Peak Advisors 

• Markets often provide feedback loops thus generating reactions in the underlying economy by government, businesses, and consumers.
• Uncertainty about the future is at the heart of the investment process. Current risks are eventually resolved but are always replaced with something new. The future never goes away. 
• Past history and theory may be suggestive of future patterns and tendencies, but they should be tempered by current conditions— nothing is guaranteed to happen exactly as it has in the past.
• Expected returns are not guaranteed nor are risks always rewarded; periods of disappointment are inevitable. It is helpful to think through in advance how to react to disappointing results to avoid poorly thought-through actions.

Elroy Dimson
Professor Cambridge & London Business School

• I learned the value of blending theory with practice.
• Risk is an unavoidable facet of investing. 

Kenneth R. French
Professor Dartmouth College

• Financial markets will remain volatile, with lots of unexpected challenges and opportunities. 

William Berstein
Cofounder Efficient Frontier Advisors

• Internalize the disappointment of low expected returns as the price paid for living in the safest and most prosperous era in the human adventure. No sane person, after all, would find adequate compensation for the 18th century’s punishing living conditions in high single-digit real bond returns, let alone the hell of medieval or ancient life in double-digit real returns. In other words, rejoice in your material existence and make sure both you and your clients save your shekels, because low future returns mandate that you’re all going to need to.

William N. Goetzmann
Professor Yale School of Management 

• History is an important reference for informed investment decision making; however, it can also be misinterpreted when its biases are not understood.
• There are a few basic approaches to dealing with these biases. None are perfect, but some can help. From the perspective of investment practice, when you are considering a new asset class—like cryptocurrency—ask yourself why it has come to your attention. When constructing a database to study the risk and return characteristics, avoid backfilling. Collect data you know were available in real time. Do not ignore or omit problematic, messy, or incomplete records. These may contain useful information about market failure.
• Investors also worry a lot about bubbles. Humans seem to react much more to catastrophes than to good news.
• Studying long-term financial data is more like archaeology than history. Historians have the luxury of rich archival records, but archaeologists make do with the few artifacts that survived deep time. Financial market historians must draw inferences from incomplete or puzzling price records generated by trader's decades or centuries ago. Our data are almost always missing the living context of how trades were conceived, executed, and recorded.

Aswath Damodaran
Professor NYU

• No matter how prepared we are, the market will surprise us.
• Value and price are different concepts, come from different processes, and can yield different numbers for the same asset at the same point in time.
• The value of an asset is a function of three variables: the level of cash flows, the growth in these cash flows, and the risk that the expected cash flows will not be delivered. The price of an asset is determined by market demand and supply, and while fundamentals.
• Unfortunately, it is those who are confused about the contrast between price and value who face the most danger in markets, as they bring the wrong tools to play the game.

 
In reading the insights from all 25 luminaries, several commonalities are found among them:

1. Although the recipients’ accomplishments are individually impressive, they are equally humble as they understand there is always more to learn. 
2. Models have limitations, assumptions are just that, assumptions, and they appreciate that no one can consistently and accurately predict the unknowable future.  
3. Successful investors appreciate the power of fear and greed, and they know where they do and do not have an edge.
4. Successful investing is a long-term endeavor. 
5. They all have insatiable amount of curiosity in their field.

-Paul R. Rossi, CFA
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Investment Luminaries and Their Insights
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