I read lots of financial news and commentary. Eight to 10 hours a day (It's my job). I've honed the skill of quickly filtering, and can usually tell within the first sentence or two whether something is worth reading, or if it should be passed up.
Last week I read a 1981 speech by Dean Williams of Batterymarch Financial Management. Right away it was clear that it was worth reading. When I got to the end I realized something else: It may have been the smartest investment commentary I've ever read.
If you have the time, please read the whole speech here. It's not long, and I guarantee you will end up wiser in the end. If not, allow me to quote from it liberally.
On predictability: "The first is an analogy between physics and investing. With apologies to anyone who knows anything about physics -- or about investing, for that matter -- let me put it this way: The foundation of Newtonian physics was that physical events are governed by physical laws. Laws that we could understand rationally. And if we learned enough about those laws, we could extend our knowledge and influence over our environment. That was also the foundation for most of the security analysis, technical analysis, economic theory and forecasting methods you and I learned about when we first began in this business. There were rational and predictable economic forces. And if we just tried hard enough ... if we learned every detail about a company ... if we discovered just the right variables for our forecasting models ... earnings and prices and interest rates would all behave in rational and predictable ways. If we just tried hard enough.
In the last fifty years a new physics came along. Quantum, or sub-atomic physics. The clues it left along its trail frustrated the best scientific minds in the world. Evidence began to mount that our knowledge of what governed events on the subatomic level wasn't nearly what we thought it would be. Those events didn't seem subject to rational behavior or predictions. Soon it wasn't clear whether it was even possible to observe and measure subatomic events, or whether the observing measurments were, themselves, changing or even causing those events. What I have to tell you tonight is that [investing] is a lot more like quantum physics that it is like Newtonian physics. There's just too much evidence that our knowledge of what governs financial and economic events isn't nearly what we thought it would be."
On cycles: "If there is a reliable and helpful principle at work in our markets, my choice would be the one the statisticians call 'regression to the mean.' The tendency toward average profitability is a fundamental, if not the fundamental principle of competitive markets. It's an inevitable force, pushing those profits and their valuations back to the average ... Its plain English equivalent is that something usually happens to keep both good news and bad news from going on forever."
On flexibility: "[Smart investors have] a very special tolerance for the concept of 'nonsense,' or what the Zen call 'Beginner's Mind.' I could have saved myself a lot of time if I hadn't been so quick to label as 'nonsense' a lot of the ideas I now accept as good sense. Expertise is great, but it has a bad side effect. It tends to create an inability to accept new ideas."
On priorities: "We have analysts. We get research reports from brokers. We get forecasts about the economy, interest rates, the stock market. We process that information and act on the basis of it. For all of that to make any sense, we all have to believe we can generate information which is unknown to the market as a whole.
There's an approach which is simpler and probably stands a better chance of working. Spend your time measuring value instead of generating information. Don't forecast. Buy what's cheap today. Let other people deal with the odds against predicting the future."
On forecasts: "Ray DeVoe, the market writer, makes a claim which I let stand, no questions asked. It's that he has collected several examples of graffiti from the walls of ladies restrooms. One, in particular, stuck a sympathetic note with me. It was apparently written by a woman who had concluded, after years of dealing with men, that it just wasn't worth the bother and who needs 'em anyway. It was 'A woman without a man is like a fish without a bicycle.' Give life a try without forecasts. You might even decide, as I have, that a portfolio manager without a forecast is also a little like a fish without a bicycle."
On growth: "In recent years, some growth companies have been the ones that could raise their prices the fastest. Before that it was the ones that sold more and more of everything from Pringles to instant film to lipstick. Before that it was the ones that understood the math of offering stock at forty times earnings to buy companies selling at twenty times earnings. Before that it was life insurance and, believe it or not, electric utilities. About before that, steel and automobiles and railroads.
The point is that growth -- for those companies that enjoy it -- is usually only a phase between the early years and the maturity and loss of leadership that probably will be in every company's future. Like life itself, it has to be appreciated in its own time."
On valuation: "If you're going to manage money mechanically, a good rule is: Buy the stocks with the lowest multiples. Imagine two portfolios. One has stocks that we all agree are the 'best' companies, with the best prospects for growth. And they're priced that way. To justify those prices they all have to meet our expectations. But we know that some of them won't. They'll disappoint us. The other portfolio has all the companies we don't like or don't care about. They're priced on low expectations. But we know that some of them will surprise us and do well. And since we haven't paid for the expectation that any will do well, that's the portfolio with the odds in its favor."
On simplicity: You may have missed the news that for the last ten years the best investment record in the country belong to the Citizens Bank and Trust Company of Chillicothe, Missouri. Forbes Magazine did not miss it, though, and sent a reporter to Chillicothe to find the genius responsible for it. He found a 72 year old man named Edgerton Welch, who said he'd never heard of Benjamin Graham and didn't have any idea what modern portfolio theory was. 'Well, how did you do it,' the reporter wanted to know. Mr. Welch showed the reporter his copy of Value Line and said he bought all the stocks ranked '1' that Merrill Lynch or EF Hutton also liked. And when any of the three changed their ratings, he sold. Mr. Welch said, 'It's like owning a computer. When you get the printout, use the figures to make a decision -- not your own impulse.' The Forbes reporter finally concluded, 'His secret isn't the system but his own consistency.' Exactly. That's what Garfield Drew, the market writer, meant forty years ago when he said, 'In fact, simplicity or singleness of approach is a greatly underestimated factor of market success.'"
Honestly, it's well worth your time to read the whole thing. Here it is again.