IFA Podium

A Look Back at a Classic (and Prescient) Investment Speech

IFA Podium

“Trying Too Hard” is the title of the 1981 keynote speech delivered by Dean Williams of Batterymarch Financial Management to the Financial Analysts Federation Seminar. Unlike most other investment speeches whose age is measured in decades, this one is 100% relevant to today. The title refers to a seemingly simple question that Williams received from an elder (and a highly regarded member of the investment profession) after presenting a detailed analysis to support his buy and sell recommendations for certain stocks: “Do you think you might be trying too hard?” Several years of deep reflection brought Williams to the realization that the question was a very profound one that goes to the heart of the relevance of all the analytical work that is part and parcel of active management.  Williams articulates his doubts when he remarks, “No matter how hard we try, we may not be as important to the results as we’d like to think we are.”

Williams draws an insightful analogy between physics and investing. Beginning with classical physics, just as the movement of planetary bodies is governed by Newton’s Laws of Motion and gravitation, many investors (both amateur and professional) make the assumption that the movement of prices can be predicted as long as all the relevant variables are clearly understood (i.e., just try hard enough). Unfortunately, the results delivered by investment analysts suggest that nothing other than luck is occurring. Specifically, Williams cites the work of Alfred Cowles who reviewed about thirty years of forecasts that were published in the Wall Street Journal and found that 50% were right and 50% were wrong. Williams says that we should look beyond Newtonian physics to quantum physics to obtain a deeper understanding of investing. Rather than everything being measurable and predictable, it is probability and uncertainty that describe the investment world.

Williams’ conclusions about the utility of forecasting are especially poignant:

“Confidence in a forecast rises with the amount of information that goes into it. But the accuracy of the forecast stays the same. And when it comes to forecasting—as opposed to doing something—a lot of expertise is no better than a little expertise and may even be worse.”

Ironically, Williams appears to have successfully predicted the findings of Professor Philip Tetlock whose work on the ubiquitous failure of expert predictions is considered authoritative in many different fields.

Since Williams pretty much trashes all the bells and whistles of technical and fundamental analysis, what’s a mother to do? Williams provides an elegant answer that foreshadows the birth of value-based indexing:

“Spend your time measuring value instead of generating information. Don’t forecast. Buy what is cheap today. Let other people deal with the odds against predicting the future.”

Williams fleshes out his recommendation when he summarizes Benjamin Graham’s approach to investing as “buying a diversified list of statically cheap stocks.”

Once an investor has decided to tear up the forecasts and simply buy a collection of stocks that are priced at low valuations such as price-to-book ratios, the equally important requirement of success is staying disciplined, which is incredibly difficult even for the most seasoned investors. Williams cites an article from Pension & Investment Age discussing how the best ten-year investment record belonged to an obscure 72-year-old man from a no-name bank in rural Missouri. The man had never heard of Benjamin Graham or of modern portfolio theory. He simply bought all the stocks that received a “1” rating from Value-Line as well as buy recommendations from Merrill Lynch and E.F. Hutton, and when any of the three changed their rating, he would immediately sell. Clearly, it was not the merit of his approach that explained his results but rather his unflinching consistency and luck, of course. Williams quotes financial writer Garfield Drew who said, “In fact, simplicity or singleness of approach is a greatly underestimated factor of market success.”

In this article, we have only scratched the surface of all the gems of investment wisdom that are found in this speech. We wholeheartedly recommend that you read it in its entirety.