The Art of Looking Stupid

The investment management industry is filled with thousands of extremely smart people. Top in their class smart. It could easily be argued that there is an oversupply of smart investors. Throughout their lives they’ve received accolades and pats on the back reconfirming what they already know – they’re extraordinarily smart. One thing I’ve learned over the years is smart investors – understandably – don’t like to look stupid.

While I have absolutely no data to support this, with an investment world overflowing with smart people, I believe there is a shortage of professional investors willing to look stupid.

That’s a shame as looking stupid is often necessary when practicing absolute return investing. I have a long track record that proves I’m more than willing to look dumb. There have been times when my relative performance was so bad, Bloomberg ranked it “N.A.” Embarrassing to most managers, I view my “stupid” positioning as a necessary part of my process, providing me with the ability to generate attractive absolute returns over a complete market cycle (my investment objective). As long as performance deviations aren’t due to valuation errors and permanent losses to capital, investing differently during periods of inflated valuations may not be stupid at all, but a sign of discipline, perseverance, and even intelligence. In other words, looking stupid is not the same as being stupid.

Instead of being ashamed or embarrassed, I view my ability and willingness to look stupid as a competitive advantage. If there was a market leader in looking stupid during irrational markets, I would like to think I’d be on the short list. I’m sure my current positioning doesn’t look very bright either. But this isn’t new for me. Patient positioning almost always looks questionable or unintelligent during periods of sharply rising asset prices and inflated valuations.

The secret of looking stupid, is not caring what other people think. Perception risk is a very real and underappreciated risk in the investment management industry. In my opinion, it’s one of the leading threats to investment discipline and one of the reasons so many active funds look the same as their peers and benchmarks. If you’re constantly concerned about what your boss, peers, and clients think about you and your positioning, you’ll never master the art of looking stupid.

To be clear, looking stupid indefinitely is not a smart long-term strategy. For instance, an absolute return investor shouldn’t remain patient or overly conservative throughout the entire market cycle. The goal of positioning differently, or remaining patient during market extremes, is to ultimately take advantage of the inefficiencies and distortions created by conformity and group-think. Eventually cycles end and the mispricing and extrapolation of market extremes unwind. This unwind can create tremendous opportunity, which should allow flexible absolute return investors to shift from patient to aggressive positioning. In effect, there should a period each market cycle when opportunistic and aggressive positioning is necessary and ultimately beneficial.

The purpose of looking stupid is to look smart over a complete cycle. While I’ve had some of the worst in-between cycle performance, I’ve also had some of the best complete cycle returns. To successfully look stupid and generate attractive full-cycle absolute returns, investors might consider setting their egos aside, think independently, and eliminate the importance placed on perception. Good luck!

Looking stupid isn’t as easy as it appears!

Have a great weekend. Hopefully we can start talking about some company-specific operating results soon as we enter earnings season. I’m looking forward to it.